These 4 Measures Indicate That Coupang (NYSE:CPNG) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Coupang, Inc. (NYSE:CPNG) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Coupang

What Is Coupang's Net Debt?

As you can see below, at the end of June 2024, Coupang had US$1.55b of debt, up from US$1.14b a year ago. Click the image for more detail. But it also has US$5.54b in cash to offset that, meaning it has US$3.99b net cash.

How Healthy Is Coupang's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Coupang had liabilities of US$7.86b due within 12 months and liabilities of US$3.39b due beyond that. Offsetting these obligations, it had cash of US$5.54b as well as receivables valued at US$547.0m due within 12 months. So it has liabilities totalling US$5.17b more than its cash and near-term receivables, combined.

Given Coupang has a humongous market capitalization of US$40.5b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Coupang boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Coupang's saving grace is its low debt levels, because its EBIT has tanked 25% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Coupang's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Coupang has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Coupang actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Coupang's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$3.99b. And it impressed us with free cash flow of US$1.5b, being 356% of its EBIT. So we are not troubled with Coupang's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Coupang .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.