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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Monster Beverage Corporation (NASDAQ:MNST) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Monster Beverage's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Monster Beverage had US$748.7m of debt, an increase on none, over one year. But on the other hand it also has US$1.56b in cash, leading to a US$816.0m net cash position.

A Look At Monster Beverage's Liabilities

We can see from the most recent balance sheet that Monster Beverage had liabilities of US$1.16b falling due within a year, and liabilities of US$1.03b due beyond that. Offsetting these obligations, it had cash of US$1.56b as well as receivables valued at US$1.35b due within 12 months. So it actually has US$723.9m more liquid assets than total liabilities.

Having regard to Monster Beverage's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$52.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Monster Beverage boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Monster Beverage grew its EBIT at 14% 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 Monster Beverage'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Monster Beverage 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. Over the most recent three years, Monster Beverage recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Monster Beverage has net cash of US$816.0m, as well as more liquid assets than liabilities. So is Monster Beverage's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in Monster Beverage would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.