Here's Why IG Design Group (LON:IGR) Can Manage Its Debt Responsibly

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. We note that IG Design Group plc (LON:IGR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for IG Design Group

What Is IG Design Group's Debt?

The image below, which you can click on for greater detail, shows that at March 2023 IG Design Group had debt of US$34.7m, up from US$20.0m in one year. However, its balance sheet shows it holds US$85.2m in cash, so it actually has US$50.5m net cash.

A Look At IG Design Group's Liabilities

We can see from the most recent balance sheet that IG Design Group had liabilities of US$194.9m falling due within a year, and liabilities of US$89.5m due beyond that. On the other hand, it had cash of US$85.2m and US$84.6m worth of receivables due within a year. So it has liabilities totalling US$114.6m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$181.8m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, IG Design Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, IG Design Group's EBIT launched higher than Elon Musk, gaining a whopping 102% on last year. 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 IG Design Group'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 company can only pay off debt with cold hard cash, not accounting profits. IG Design Group 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, IG Design Group actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although IG Design Group'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$50.5m. And it impressed us with free cash flow of US$41m, being 171% of its EBIT. So we don't have any problem with IG Design Group's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with IG Design Group .

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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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.