The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. 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?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does init innovation in traffic systems Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2021 init innovation in traffic systems had €30.3m of debt, an increase on €28.7m, over one year. However, it does have €38.1m in cash offsetting this, leading to net cash of €7.81m.
How Strong Is init innovation in traffic systems' Balance Sheet?
We can see from the most recent balance sheet that init innovation in traffic systems had liabilities of €64.8m falling due within a year, and liabilities of €62.1m due beyond that. On the other hand, it had cash of €38.1m and €48.6m worth of receivables due within a year. So its liabilities total €40.1m more than the combination of its cash and short-term receivables.
Given init innovation in traffic systems has a market capitalization of €394.2m, it's hard to believe these liabilities pose much threat. 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, init innovation in traffic systems boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, init innovation in traffic systems saw its EBIT drop by 6.4% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 init innovation in traffic systems'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, a company can only pay off debt with cold hard cash, not accounting profits. While init innovation in traffic systems 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. Over the last three years, init innovation in traffic systems actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Although init innovation in traffic systems's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €7.81m. And it impressed us with free cash flow of €23m, being 113% of its EBIT. So we don't think init innovation in traffic systems's use of debt is risky. 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, we've discovered 1 warning sign for init innovation in traffic systems that you should be aware of before investing here.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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