These 4 Measures Indicate That MercadoLibre (NASDAQ:MELI) Is Using Debt Safely

editorial-team@simplywallst.com (Simply Wall St)

Sun, Nov 12, 2023, 6:00 AM 4 min read

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies MercadoLibre, Inc. (NASDAQ:MELI) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for MercadoLibre

How Much Debt Does MercadoLibre Carry?

As you can see below, MercadoLibre had US$4.39b of debt at September 2023, down from US$4.64b a year prior. However, its balance sheet shows it holds US$5.49b in cash, so it actually has US$1.10b net cash.

debt-equity-history-analysis — NasdaqGS:MELI Debt to Equity History November 12th 2023

How Strong Is MercadoLibre's Balance Sheet?

According to the last reported balance sheet, MercadoLibre had liabilities of US$10.3b due within 12 months, and liabilities of US$3.08b due beyond 12 months. Offsetting these obligations, it had cash of US$5.49b as well as receivables valued at US$5.87b due within 12 months. So it has liabilities totalling US$2.02b more than its cash and near-term receivables, combined.

Since publicly traded MercadoLibre shares are worth a very impressive total of US$69.5b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, MercadoLibre also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, MercadoLibre grew its EBIT by 168% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if MercadoLibre can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. MercadoLibre may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, MercadoLibre 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

We could understand if investors are concerned about MercadoLibre's liabilities, but we can be reassured by the fact it has has net cash of US$1.10b. The cherry on top was that in converted 193% of that EBIT to free cash flow, bringing in US$4.3b. So is MercadoLibre's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of MercadoLibre's earnings per share history for free.

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.