Ferrexpo (LON:FXPO) Seems To Use Debt Rather Sparingly

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.' 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. We can see that Ferrexpo plc (LON:FXPO) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Ferrexpo

What Is Ferrexpo's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Ferrexpo had US$15.3m of debt in June 2021, down from US$334.8m, one year before. But it also has US$234.7m in cash to offset that, meaning it has US$219.3m net cash.

How Healthy Is Ferrexpo's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ferrexpo had liabilities of US$281.5m due within 12 months and liabilities of US$39.4m due beyond that. Offsetting this, it had US$234.7m in cash and US$249.7m in receivables that were due within 12 months. So it actually has US$163.4m more liquid assets than total liabilities.

This surplus suggests that Ferrexpo has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Ferrexpo boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Ferrexpo grew its EBIT by 177% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ferrexpo'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Ferrexpo 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. Over the most recent three years, Ferrexpo recorded free cash flow worth 56% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Ferrexpo has US$219.3m in net cash and a decent-looking balance sheet. And we liked the look of last year's 177% year-on-year EBIT growth. So we don't think Ferrexpo's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Ferrexpo you should be aware of, and 1 of them is significant.

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.

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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