We Think Indivior (LON:INDV) Can Stay On Top Of Its Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Indivior PLC (LON:INDV) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Indivior

How Much Debt Does Indivior Carry?

As you can see below, Indivior had US$239.0m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$689.0m in cash offsetting this, leading to net cash of US$450.0m.

A Look At Indivior's Liabilities

According to the last reported balance sheet, Indivior had liabilities of US$972.0m due within 12 months, and liabilities of US$642.0m due beyond 12 months. Offsetting this, it had US$689.0m in cash and US$240.0m in receivables that were due within 12 months. So it has liabilities totalling US$685.0m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Indivior has a market capitalization of US$2.64b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Indivior also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Indivior grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Indivior 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. Indivior 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. In the last three years, Indivior's free cash flow amounted to 36% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

Although Indivior's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$450.0m. And it impressed us with its EBIT growth of 29% over the last year. So we don't have any problem with Indivior's use of debt. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Indivior insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.