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.’ 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, World Fuel Services Corporation (NYSE:INT) does carry debt. But should shareholders be worried about its use of debt?
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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is World Fuel Services’s Debt?
You can click the graphic below for the historical numbers, but it shows that World Fuel Services had US$466.5m of debt in March 2021, down from US$1.18b, one year before. However, it does have US$735.3m in cash offsetting this, leading to net cash of US$268.8m.
How Healthy Is World Fuel Services’ Balance Sheet?
Zooming in on the latest balance sheet data, we can see that World Fuel Services had liabilities of US$2.09b due within 12 months and liabilities of US$890.2m due beyond that. Offsetting this, it had US$735.3m in cash and US$1.67b in receivables that were due within 12 months. So its liabilities total US$577.9m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since World Fuel Services has a market capitalization of US$1.94b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, World Fuel Services boasts net cash, so it’s fair to say it does not have a heavy debt load!
Importantly, World Fuel Services’s EBIT fell a jaw-dropping 56% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 World Fuel Services’s ability to maintain a healthy balance sheet going forward.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. World Fuel Services 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. Happily for any shareholders, World Fuel Services actually produced more free cash flow than EBIT over the last three years. There’s nothing better than incoming cash when it comes to staying in your lenders’ good graces.
While World Fuel Services does have more liabilities than liquid assets, it also has net cash of US$268.8m. And it impressed us with free cash flow of US$662m, being 105% of its EBIT. So we don’t have any problem with World Fuel Services’s use of debt. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet.