Is iEnergizer (LON:IBPO) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 iEnergizer Limited (LON:IBPO) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for iEnergizer

How Much Debt Does iEnergizer Carry?

The image below, which you can click on for greater detail, shows that iEnergizer had debt of US$33.2m at the end of September 2020, a reduction from US$48.8m over a year. But on the other hand it also has US$52.9m in cash, leading to a US$19.7m net cash position.

A Look At iEnergizer's Liabilities

According to the last reported balance sheet, iEnergizer had liabilities of US$37.8m due within 12 months, and liabilities of US$43.9m due beyond 12 months. Offsetting this, it had US$52.9m in cash and US$30.6m in receivables that were due within 12 months. So it can boast US$1.82m more liquid assets than total liabilities.

This state of affairs indicates that iEnergizer's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$722.8m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, iEnergizer boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that iEnergizer grew its EBIT by 13% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if iEnergizer 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. iEnergizer 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 three years, iEnergizer recorded free cash flow worth a fulsome 95% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case iEnergizer has US$19.7m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 95% of that EBIT to free cash flow, bringing in US$54m. So is iEnergizer's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with iEnergizer .

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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