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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies PriceSmart, Inc. (NASDAQ:PSMT) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, 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.
See our latest analysis for PriceSmart
How Much Debt Does PriceSmart Carry?
The image below, which you can click on for greater detail, shows that at February 2022 PriceSmart had debt of US$165.1m, up from US$153.3m in one year. But on the other hand it also has US$207.2m in cash, leading to a US$42.1m net cash position.
How Strong Is PriceSmart's Balance Sheet?
According to the last reported balance sheet, PriceSmart had liabilities of US$560.6m due within 12 months, and liabilities of US$258.9m due beyond 12 months. On the other hand, it had cash of US$207.2m and US$29.6m worth of receivables due within a year. So it has liabilities totalling US$582.6m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since PriceSmart has a market capitalization of US$2.45b, 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, PriceSmart boasts net cash, so it's fair to say it does not have a heavy debt load!
Also good is that PriceSmart grew its EBIT at 15% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine PriceSmart's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.