Does Integrated Diagnostics Holdings (LON:IDHC) Have A Healthy Balance Sheet?

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.' 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, Integrated Diagnostics Holdings plc (LON:IDHC) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Integrated Diagnostics Holdings

How Much Debt Does Integrated Diagnostics Holdings Carry?

The image below, which you can click on for greater detail, shows that at March 2022 Integrated Diagnostics Holdings had debt of ج.م98.1m, up from ج.م93.0m in one year. But on the other hand it also has ج.م2.66b in cash, leading to a ج.م2.56b net cash position.

A Look At Integrated Diagnostics Holdings' Liabilities

The latest balance sheet data shows that Integrated Diagnostics Holdings had liabilities of ج.م2.49b due within a year, and liabilities of ج.م1.21b falling due after that. On the other hand, it had cash of ج.م2.66b and ج.م471.2m worth of receivables due within a year. So it has liabilities totalling ج.م573.3m more than its cash and near-term receivables, combined.

Since publicly traded Integrated Diagnostics Holdings shares are worth a total of ج.م9.46b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Integrated Diagnostics Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Integrated Diagnostics Holdings grew its EBIT by 55% over the last twelve months, and that growth will make it easier to handle its debt. 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 Integrated Diagnostics Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Integrated Diagnostics Holdings 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. Over the last three years, Integrated Diagnostics Holdings recorded free cash flow worth a fulsome 80% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Integrated Diagnostics Holdings has ج.م2.56b in net cash. And it impressed us with free cash flow of ج.م1.8b, being 80% of its EBIT. So is Integrated Diagnostics Holdings's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Integrated Diagnostics Holdings is showing 2 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.