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.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Meta Platforms, Inc. (NASDAQ:META) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 examine debt levels, we first consider both cash and debt levels, together.
What Is Meta Platforms’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Meta Platforms had US$18.4b of debt, an increase on US$9.92b, over one year. But it also has US$61.1b in cash to offset that, meaning it has US$42.7b net cash.
How Healthy Is Meta Platforms’ Balance Sheet?
We can see from the most recent balance sheet that Meta Platforms had liabilities of US$30.5b falling due within a year, and liabilities of US$42.9b due beyond that. Offsetting these obligations, it had cash of US$61.1b as well as receivables valued at US$12.9b due within 12 months. So these liquid assets roughly match the total liabilities.
This state of affairs indicates that Meta Platforms’ balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it’s hard to imagine that the US$861.0b company is struggling for cash, we still think it’s worth monitoring its balance sheet. Succinctly put, Meta Platforms boasts net cash, so it’s fair to say it does not have a heavy debt load!
Also positive, Meta Platforms grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Meta Platforms’s ability to maintain a healthy balance sheet going forward.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Meta Platforms 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, Meta Platforms produced sturdy free cash flow equating to 79% of its EBIT, about what we’d expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
While we empathize with investors who find debt concerning, you should keep in mind that Meta Platforms has net cash of US$42.7b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$38b, being 79% of its EBIT. So is Meta Platforms’s debt a risk? It doesn’t seem so to us.