We Think Iluka Resources (ASX:ILU) Can Manage Its Debt With Ease

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, Iluka Resources Limited (ASX:ILU) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Iluka Resources

What Is Iluka Resources's Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Iluka Resources had debt of AU$33.0m, up from none in one year. But it also has AU$521.7m in cash to offset that, meaning it has AU$488.7m net cash.

How Strong Is Iluka Resources' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Iluka Resources had liabilities of AU$373.8m due within 12 months and liabilities of AU$733.2m due beyond that. On the other hand, it had cash of AU$521.7m and AU$256.0m worth of receivables due within a year. So it has liabilities totalling AU$329.3m more than its cash and near-term receivables, combined.

Of course, Iluka Resources has a market capitalization of AU$4.58b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Iluka Resources boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Iluka Resources has boosted its EBIT by 45%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Iluka Resources'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Iluka Resources 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. Over the most recent three years, Iluka Resources recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Iluka Resources's liabilities, but we can be reassured by the fact it has has net cash of AU$488.7m. And it impressed us with its EBIT growth of 45% over the last year. So we don't think Iluka Resources's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Iluka Resources that you should be aware of before investing here.

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.