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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, IGO Limited (ASX:IGO) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for IGO
How Much Debt Does IGO Carry?
As you can see below, IGO had AU$357.9m of debt at June 2023, down from AU$890.0m a year prior. But on the other hand it also has AU$837.6m in cash, leading to a AU$479.7m net cash position.
A Look At IGO's Liabilities
The latest balance sheet data shows that IGO had liabilities of AU$410.0m due within a year, and liabilities of AU$537.7m falling due after that. On the other hand, it had cash of AU$837.6m and AU$156.8m worth of receivables due within a year. So it actually has AU$46.7m more liquid assets than total liabilities.
Having regard to IGO's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the AU$6.78b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, IGO boasts net cash, so it's fair to say it does not have a heavy debt load!
Shareholders should be aware that IGO's EBIT was down 72% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 IGO'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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. IGO may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, IGO actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing Up
While it is always sensible to investigate a company's debt, in this case IGO has AU$479.7m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of AU$1.1b, being 272% of its EBIT. So we are not troubled with IGO's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for IGO that you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
About ASX:IGO
IGO
Operates as an exploration and mining company that engages in discovering, developing, and operating assets focused on metals to enable clean energy in Australia.
Flawless balance sheet, good value and pays a dividend.