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. Importantly, Euronet Worldwide, Inc. (NASDAQ:EEFT) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Euronet Worldwide’s Debt?

As you can see below, at the end of March 2021, Euronet Worldwide had US$1.14b of debt, up from US$1.09b a year ago. Click the image for more detail. But it also has US$1.49b in cash to offset that, meaning it has US$341.5m net cash.

How Healthy Is Euronet Worldwide’s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Euronet Worldwide had liabilities of US$1.60b due within 12 months and liabilities of US$1.34b due beyond that. On the other hand, it had cash of US$1.49b and US$111.4m worth of receivables due within a year. So its liabilities total US$1.35b more than the combination of its cash and short-term receivables.

Since publicly traded Euronet Worldwide shares are worth a total of US$7.95b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Euronet Worldwide boasts net cash, so it’s fair to say it does not have a heavy debt load!

Shareholders should be aware that Euronet Worldwide’s EBIT was down 71% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 Euronet Worldwide can strengthen its balance sheet over time.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Euronet Worldwide 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, Euronet Worldwide recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we’d usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

Although Euronet Worldwide’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$341.5m. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in US$61m. So we are not troubled with Euronet Worldwide’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.