Warren Buffett said: “Volatility is far from synonymous with risk. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We can see that Global Fuel Services Company (NYSE: INT) uses debt in its operations. But does this debt worry shareholders?
When is debt a problem?
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. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, many companies use debt to finance their growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.
What is World Fuel Services’ net debt?
As you can see below, World Fuel Services had $493.9 million in debt as of September 2021, about the same as the year before. You can click on the graph for more details. However, his balance sheet shows that he holds $796.0 million in cash, so he actually has $302.1 million in net cash.
A look at the liabilities of World Fuel Services
Zooming in on the latest balance sheet data, we can see that World Fuel Services had liabilities of US$2.70 billion due within 12 months and liabilities of US$924.0 million due beyond. In compensation for these obligations, it had cash of US$796.0 million as well as receivables valued at US$2.03 billion and payable within 12 months. Thus, its liabilities total $792.0 million more than the combination of its cash and short-term receivables.
This shortfall isn’t that bad because World Fuel Services is worth $1.80 billion and therefore could probably raise enough capital to shore up its balance sheet, should the need arise. But it is clear that it is essential to examine closely whether it can manage its debt without dilution. Despite its notable liabilities, World Fuel Services has a net cash position, so it is fair to say that it is not very leveraged!
Importantly, World Fuel Services’ EBIT has fallen 33% over the last twelve months. If this decline continues, it will be more difficult to repay debts than to sell foie gras at a vegan convention. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine World Fuel Services’ ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Finally, a company can only repay its debts with cold hard cash, not with book profits. Although World Fuel Services has net cash on its balance sheet, it is always worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how quickly it is growing. builds (or erodes) cash balance. Over the past three years, World Fuel Services has actually produced more free cash flow than EBIT. This kind of high cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Although World Fuel Services’ balance sheet is not particularly strong, due to total liabilities, it is clearly positive to see that it has a net cash position of $302.1 million. And it impressed us with free cash flow of $303 million, or 144% of its EBIT. So we have no problem with the use of debt by World Fuel Services. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example – World Fuel Services has 2 warning signs we think you should know.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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