Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 the real question is whether this debt is making the company risky.
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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for IG Design Group
What Is IG Design Group's Net Debt?
You can click the graphic below for the historical numbers, but it shows that IG Design Group had US$100.0m of debt in September 2020, down from US$251.2m, one year before. However, it also had US$76.8m in cash, and so its net debt is US$23.2m.
A Look At IG Design Group's Liabilities
The latest balance sheet data shows that IG Design Group had liabilities of US$412.7m due within a year, and liabilities of US$116.5m falling due after that. Offsetting these obligations, it had cash of US$76.8m as well as receivables valued at US$296.7m due within 12 months. So its liabilities total US$155.8m more than the combination of its cash and short-term receivables.
Given IG Design Group has a market capitalization of US$795.0m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
With net debt sitting at just 0.46 times EBITDA, IG Design Group is arguably pretty conservatively geared. And it boasts interest cover of 7.1 times, which is more than adequate. But the other side of the story is that IG Design Group saw its EBIT decline by 8.1% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. Over the most recent three years, IG Design Group recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Our View
IG Design Group's conversion of EBIT to free cash flow suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But truth be told we feel its EBIT growth rate does undermine this impression a bit. All these things considered, it appears that IG Design Group can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. 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. For example, we've discovered 2 warning signs for IG Design Group that you should be aware of before investing here.
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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About AIM:IGR
IG Design Group
Engages in the design, production, and distribution of celebrations, craft and creative play, stationery, gifting, and not for re-sale consumable products in the Americas, the United Kingdom, Netherlands, and internationally.
Flawless balance sheet and slightly overvalued.