The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Monster Beverage Corporation (NASDAQ:MNST) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Monster Beverage

How Much Debt Does Monster Beverage Carry?

The image below, which you can click on for greater detail, shows that at December 2024 Monster Beverage had debt of US$374.0m, up from none in one year. However, it does have US$1.53b in cash offsetting this, leading to net cash of US$1.16b.

A Look At Monster Beverage's Liabilities

According to the last reported balance sheet, Monster Beverage had liabilities of US$1.10b due within 12 months, and liabilities of US$663.9m due beyond 12 months. Offsetting these obligations, it had cash of US$1.53b as well as receivables valued at US$1.22b due within 12 months. So it can boast US$987.6m 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 it's very unlikely that the US$53.7b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Monster Beverage has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Monster Beverage has increased its EBIT by 3.3% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Monster Beverage can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. During the last three years, Monster Beverage produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Monster Beverage has US$1.16b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 67% of that EBIT to free cash flow, bringing in US$1.6b. So is Monster Beverage's debt a risk? It doesn't seem so to us. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Monster Beverage insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.