Is Informa (LON:INF) A Risky Investment?

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 note that Informa plc (LON:INF) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

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What Is Informa's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Informa had UK£2.22b of debt, an increase on UK£2.06b, over one year. But on the other hand it also has UK£2.51b in cash, leading to a UK£285.0m net cash position.

A Look At Informa's Liabilities

We can see from the most recent balance sheet that Informa had liabilities of UK£1.76b falling due within a year, and liabilities of UK£3.06b due beyond that. Offsetting this, it had UK£2.51b in cash and UK£482.4m in receivables that were due within 12 months. So it has liabilities totalling UK£1.83b more than its cash and near-term receivables, combined.

Informa has a market capitalization of UK£7.95b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

Notably, Informa made a loss at the EBIT level, last year, but improved that to positive EBIT of UK£285m in the last twelve months. 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 Informa's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Informa 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 last year, Informa actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Informa does have more liabilities than liquid assets, it also has net cash of UK£285.0m. And it impressed us with free cash flow of UK£460m, being 162% of its EBIT. So we don't have any problem with Informa's use of debt. 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. We've identified 1 warning sign with Informa , and understanding them should be part of your investment process.

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.