Does Ignite (ASX:IGN) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Ignite Limited (ASX:IGN) does use debt in its business. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Ignite

What Is Ignite's Net Debt?

As you can see below, at the end of December 2022, Ignite had AU$2.53m of debt, up from AU$708.0k a year ago. Click the image for more detail. However, it also had AU$175.0k in cash, and so its net debt is AU$2.35m.

How Healthy Is Ignite's Balance Sheet?

The latest balance sheet data shows that Ignite had liabilities of AU$6.87m due within a year, and liabilities of AU$546.0k falling due after that. On the other hand, it had cash of AU$175.0k and AU$10.7m worth of receivables due within a year. So it actually has AU$3.45m more liquid assets than total liabilities.

This luscious liquidity implies that Ignite's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. When analysing debt levels, the balance sheet is the obvious place to start. But it is Ignite's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Ignite had a loss before interest and tax, and actually shrunk its revenue by 4.1%, to AU$112m. That's not what we would hope to see.

Caveat Emptor

Importantly, Ignite had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at AU$335k. That said, we're impressed with the strong balance sheet liquidity. That should give the business time to grow its cashflow. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Ignite has 2 warning signs we think you should be aware of.

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.