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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies PriceSmart, Inc. (NASDAQ:PSMT) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for PriceSmart
What Is PriceSmart's Debt?
You can click the graphic below for the historical numbers, but it shows that PriceSmart had US$96.3m of debt in May 2019, down from US$106.7m, one year before. However, its balance sheet shows it holds US$123.5m in cash, so it actually has US$27.2m net cash.
How Strong Is PriceSmart's Balance Sheet?
The latest balance sheet data shows that PriceSmart had liabilities of US$390.3m due within a year, and liabilities of US$92.5m falling due after that. On the other hand, it had cash of US$123.5m and US$26.4m worth of receivables due within a year. So it has liabilities totalling US$333.0m more than its cash and near-term receivables, combined.
Given PriceSmart has a market capitalization of US$1.95b, 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. While it does have liabilities worth noting, PriceSmart also has more cash than debt, so we're pretty confident it can manage its debt safely.
On the other hand, PriceSmart's EBIT dived 12%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 PriceSmart can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.