IG Design Group (LON:IGR) Seems To Use Debt Quite Sensibly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, IG Design Group plc (LON:IGR) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for IG Design Group

How Much Debt Does IG Design Group Carry?

As you can see below, IG Design Group had US$41.4m of debt at September 2024, down from US$86.7m a year prior. However, its balance sheet shows it holds US$48.8m in cash, so it actually has US$7.39m net cash.

How Healthy Is IG Design Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that IG Design Group had liabilities of US$282.5m due within 12 months and liabilities of US$62.9m due beyond that. Offsetting these obligations, it had cash of US$48.8m as well as receivables valued at US$220.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$76.1m.

IG Design Group has a market capitalization of US$182.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, IG Design Group boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that IG Design Group improved its EBIT from a last year's loss to a positive US$6.0m. When analysing debt levels, the balance sheet is the obvious place to start. 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'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 IG Design Group 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, IG Design Group 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.

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$7.39m. The cherry on top was that in converted 737% of that EBIT to free cash flow, bringing in US$44m. So we don't have any problem with IG Design Group's use of debt. 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. We've identified 3 warning signs with IG Design Group (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.