Is Euronet Worldwide (NASDAQ:EEFT) using too much debt?

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Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We note that Euronet Worldwide, Inc. (NASDAQ:EEFT) has debt on its balance sheet. But the more important question is: what risk does this debt create?

What risk does debt carry?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. If things go really bad, lenders can take over the business. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.

Check out our latest analysis for Euronet Worldwide

What is Euronet Worldwide’s debt?

The image below, which you can click on for more details, shows that in March 2022, Euronet Worldwide had $1.76 billion in debt, up from $1.14 billion in one year. However, he also had $1.63 billion in cash, so his net debt is $131.6 million.

NasdaqGS: EEFT Debt History as of July 1, 2022

How strong is Euronet Worldwide’s balance sheet?

We can see from the most recent balance sheet that Euronet Worldwide had liabilities of US$1.77 billion due in one year, and liabilities of US$1.98 billion beyond. On the other hand, it had a cash position of 1.63 billion dollars and 180.1 million dollars of receivables at less than one year. Thus, its liabilities outweigh the sum of its cash and (current) receivables by $1.94 billion.

Euronet Worldwide has a market capitalization of US$5.08 billion, so it could very likely raise funds to improve its balance sheet, should the need arise. However, it is always worth taking a close look at its ability to repay debt.

We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). Thus, we consider debt to earnings with and without amortization and depreciation expense.

Given its net debt to EBITDA ratio of 0.38 and interest coverage of 6.1 times, it seems to us that Euronet Worldwide is probably using debt quite sensibly. But the interest payments are certainly enough to make us think about the affordability of its debt. On top of that, we are pleased to report that Euronet Worldwide increased its EBIT by 59%, reducing the specter of future debt repayments. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Euronet Worldwide can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, while the taxman may love accounting profits, lenders only accept cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Euronet Worldwide has actually produced more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our point of view

The good news is that Euronet Worldwide’s demonstrated ability to convert EBIT into free cash flow delights us like a fluffy puppy does a toddler. And this is only the beginning of good news since its EBIT growth rate is also very encouraging. Overall, we think Euronet Worldwide’s use of debt seems entirely reasonable and we are not worried about that. After all, reasonable leverage can increase return on equity. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we found 2 warning signs for Euronet Worldwide which you should be aware of before investing here.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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