IOG (LON:IOG) Is Carrying A Fair Bit Of Debt

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. Importantly, IOG plc (LON:IOG) does carry debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for IOG

What Is IOG's Debt?

The chart below, which you can click on for greater detail, shows that IOG had UK£92.6m in debt in June 2021; about the same as the year before. On the flip side, it has UK£57.0m in cash leading to net debt of about UK£35.6m.

How Healthy Is IOG's Balance Sheet?

The latest balance sheet data shows that IOG had liabilities of UK£46.4m due within a year, and liabilities of UK£105.6m falling due after that. Offsetting this, it had UK£57.0m in cash and UK£1.15m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£93.9m.

This deficit is considerable relative to its market capitalization of UK£126.0m, so it does suggest shareholders should keep an eye on IOG's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if IOG 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.

Given its lack of meaningful operating revenue, IOG shareholders no doubt hope it can fund itself until it can sell some combustibles.

Caveat Emptor

Importantly, IOG had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping UK£15m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through UK£38m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for IOG you should know about.

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.
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