Does Informa (LON:INF) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that Informa plc (LON:INF) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. 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.

Check out our latest analysis for Informa

What Is Informa's Debt?

As you can see below, Informa had UK£2.11b of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has UK£2.13b in cash, leading to a UK£16.9m net cash position.

How Healthy Is Informa's Balance Sheet?

We can see from the most recent balance sheet that Informa had liabilities of UK£2.01b falling due within a year, and liabilities of UK£2.67b due beyond that. Offsetting these obligations, it had cash of UK£2.13b as well as receivables valued at UK£384.3m due within 12 months. So its liabilities total UK£2.17b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Informa is worth a massive UK£10.2b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Informa also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Informa grew its EBIT by 312% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Informa 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Informa 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 two years, Informa actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Informa's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of UK£16.9m. And it impressed us with free cash flow of UK£374m, being 289% of its EBIT. So is Informa's debt a risk? It doesn't seem so to us. We'd be very excited to see if Informa insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.