Is PriceSmart (NASDAQ:PSMT) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies PriceSmart, Inc. (NASDAQ:PSMT) makes use of debt. But the more important question is: how much risk is that debt creating?

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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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does PriceSmart Carry?

The image below, which you can click on for greater detail, shows that at August 2025 PriceSmart had debt of US$205.1m, up from US$141.6m in one year. But on the other hand it also has US$314.2m in cash, leading to a US$109.1m net cash position.

How Healthy Is PriceSmart's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PriceSmart had liabilities of US$726.3m due within 12 months and liabilities of US$295.5m due beyond that. On the other hand, it had cash of US$314.2m and US$50.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$657.6m.

Given PriceSmart has a market capitalization of US$3.92b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, PriceSmart also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for PriceSmart

Fortunately, PriceSmart grew its EBIT by 6.5% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While PriceSmart 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. In the last three years, PriceSmart's free cash flow amounted to 39% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While PriceSmart does have more liabilities than liquid assets, it also has net cash of US$109.1m. On top of that, it increased its EBIT by 6.5% in the last twelve months. So we don't have any problem with PriceSmart's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for PriceSmart you should know about.

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.