Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. We can see that IG Design Group plc (LON: IGR) uses debt in its business. But the most important question is: what risk does this debt create?
What risk does debt entail?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. 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 where a company has to dilute its shareholders at a cheap share price just to get its debt under control. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider both cash and debt levels.
Check out our latest review for IG Design Group
How much debt does IG Design Group have?
The image below, which you can click for more details, shows that in March 2021, IG Design Group was in debt of US $ 56.6 million, up from US $ 30.9 million in one year. . But on the other hand, it also has $ 132.8 million in cash, which leads to a net cash position of $ 76.2 million.
How strong is IG Design Group’s balance sheet?
According to the latest published balance sheet, IG Design Group had liabilities of US $ 252.9 million due within 12 months and liabilities of US $ 118.3 million due beyond 12 months. On the other hand, he had US $ 132.8 million in cash and US $ 118.5 million in receivables within one year. It therefore has a liability totaling US $ 120.0 million more than its combined cash and short-term receivables.
Considering that IG Design Group has a market capitalization of US $ 754.7 million, it’s hard to believe that these liabilities pose a big threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. While it has some liabilities to note, IG Design Group also has more cash than debt, so we’re pretty confident it can handle its debt safely.
But the other side of the story is that IG Design Group has seen its EBIT drop 7.2% in the past year. This kind of decline, if it continues, will obviously make debt more difficult to manage. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine IG Design Group’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. Although IG Design Group has net cash on its balance sheet, it is still worth examining its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how quickly it builds (or erodes) that cash balance. Fortunately for all shareholders, IG Design Group has actually generated more free cash flow than EBIT over the past three years. There is nothing better than cash flow to stay in the good graces of your lenders.
Although IG Design Group has more liabilities than liquid assets, it also has net cash of US $ 76.2 million. And he impressed us with free cash flow of US $ 56 million, or 105% of his EBIT. So we have no problem with the use of debt by IG Design Group. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example – IG Design Group has 3 warning signs we think you should be aware.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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