Is init innovation in traffic systems (ETR:IXX) Using Too Much Debt?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that init innovation in traffic systems SE (ETR:IXX) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for init innovation in traffic systems

What Is init innovation in traffic systems's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 init innovation in traffic systems had €43.9m of debt, an increase on €30.6m, over one year. However, because it has a cash reserve of €36.7m, its net debt is less, at about €7.19m.

A Look At init innovation in traffic systems' Liabilities

Zooming in on the latest balance sheet data, we can see that init innovation in traffic systems had liabilities of €84.6m due within 12 months and liabilities of €61.3m due beyond that. On the other hand, it had cash of €36.7m and €64.4m worth of receivables due within a year. So it has liabilities totalling €44.8m more than its cash and near-term receivables, combined.

Of course, init innovation in traffic systems has a market capitalization of €392.0m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

init innovation in traffic systems's net debt is only 0.29 times its EBITDA. And its EBIT easily covers its interest expense, being 18.1 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Also good is that init innovation in traffic systems grew its EBIT at 18% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if init innovation in traffic systems can strengthen its balance sheet over time. 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. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Happily for any shareholders, init innovation in traffic systems 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.

Our View

init innovation in traffic systems's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! Considering this range of factors, it seems to us that init innovation in traffic systems is quite prudent with its debt, and the risks seem well managed. So the balance sheet looks pretty healthy, to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for init innovation in traffic systems you should know about.

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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