Is Integrated Diagnostics Holdings (LON:IDHC) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Integrated Diagnostics Holdings plc (LON:IDHC) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Integrated Diagnostics Holdings

What Is Integrated Diagnostics Holdings's Net Debt?

As you can see below, at the end of June 2023, Integrated Diagnostics Holdings had ج.م107.9m of debt, up from ج.م84.8m a year ago. Click the image for more detail. However, it does have ج.م689.1m in cash offsetting this, leading to net cash of ج.م581.2m.

How Healthy Is Integrated Diagnostics Holdings' Balance Sheet?

The latest balance sheet data shows that Integrated Diagnostics Holdings had liabilities of ج.م1.32b due within a year, and liabilities of ج.م1.30b falling due after that. Offsetting this, it had ج.م689.1m in cash and ج.م608.2m in receivables that were due within 12 months. So its liabilities total ج.م1.32b more than the combination of its cash and short-term receivables.

Since publicly traded Integrated Diagnostics Holdings shares are worth a total of ج.م9.09b, 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.

In fact Integrated Diagnostics Holdings's saving grace is its low debt levels, because its EBIT has tanked 70% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Integrated Diagnostics Holdings'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Integrated Diagnostics Holdings 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. During the last three years, Integrated Diagnostics Holdings produced sturdy free cash flow equating to 63% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While Integrated Diagnostics Holdings does have more liabilities than liquid assets, it also has net cash of ج.م581.2m. So we are not troubled with Integrated Diagnostics Holdings's debt use. 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. We've identified 3 warning signs with Integrated Diagnostics Holdings , and understanding them should be part of your investment process.

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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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.