Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies IAMGOLD Corporation (TSE:IMG) makes use of debt. But should shareholders be worried about its use of debt?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is IAMGOLD's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 IAMGOLD had US$471.2m of debt, an increase on US$404.7m, over one year. However, its balance sheet shows it holds US$897.2m in cash, so it actually has US$426.0m net cash.
How Healthy Is IAMGOLD's Balance Sheet?
The latest balance sheet data shows that IAMGOLD had liabilities of US$315.1m due within a year, and liabilities of US$1.27b falling due after that. On the other hand, it had cash of US$897.2m and US$87.4m worth of receivables due within a year. So it has liabilities totalling US$599.3m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since IAMGOLD has a market capitalization of US$1.67b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, IAMGOLD also has more cash than debt, so we're pretty confident it can manage its debt safely.
It was also good to see that despite losing money on the EBIT line last year, IAMGOLD turned things around in the last 12 months, delivering and EBIT of US$86m. 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 IAMGOLD'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While IAMGOLD 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. Happily for any shareholders, IAMGOLD actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Although IAMGOLD's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$426.0m. And it impressed us with free cash flow of US$198m, being 229% of its EBIT. So we are not troubled with IAMGOLD's debt use. We'd be motivated to research the stock further if we found out that IAMGOLD insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
When trading IAMGOLD or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.
This article by Simply Wall St is general in nature. 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.