We Think EchoStar (NASDAQ:SATS) Can Stay On Top Of Its Debt

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that EchoStar Corporation (NASDAQ:SATS) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for EchoStar

What Is EchoStar's Debt?

The chart below, which you can click on for greater detail, shows that EchoStar had US$1.50b in debt in September 2023; about the same as the year before. However, its balance sheet shows it holds US$1.99b in cash, so it actually has US$491.9m net cash.

How Healthy Is EchoStar's Balance Sheet?

We can see from the most recent balance sheet that EchoStar had liabilities of US$396.7m falling due within a year, and liabilities of US$2.17b due beyond that. Offsetting this, it had US$1.99b in cash and US$243.2m in receivables that were due within 12 months. So its liabilities total US$332.2m more than the combination of its cash and short-term receivables.

EchoStar has a market capitalization of US$890.7m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, EchoStar also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the bad news is that EchoStar has seen its EBIT plunge 14% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 EchoStar'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While EchoStar 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. During the last three years, EchoStar generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

Although EchoStar'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$491.9m. And it impressed us with free cash flow of US$175m, being 84% of its EBIT. So we are not troubled with EchoStar's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for EchoStar you should be aware of, and 1 of them is potentially serious.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.