The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 can see that iEnergizer Limited (LON:IBPO) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does iEnergizer Carry?
You can click the graphic below for the historical numbers, but it shows that iEnergizer had US$33.2m of debt in September 2020, down from US$48.8m, one year before. However, its balance sheet shows it holds US$52.9m in cash, so it actually has US$19.7m net cash.
How Healthy Is iEnergizer's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that iEnergizer had liabilities of US$37.8m due within 12 months and liabilities of US$43.9m due beyond that. Offsetting these obligations, it had cash of US$52.9m as well as receivables valued at US$30.6m due within 12 months. So it actually has US$1.82m more liquid assets than total liabilities.
Having regard to iEnergizer's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$832.7m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, iEnergizer boasts net cash, so it's fair to say it does not have a heavy debt load!
Also good is that iEnergizer grew its EBIT at 13% over the last year, further increasing its ability to manage debt. 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While iEnergizer 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. During the last three years, iEnergizer generated free cash flow amounting to a very robust 95% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.
While we empathize with investors who find debt concerning, you should keep in mind that iEnergizer has net cash of US$19.7m, as well as more liquid assets than liabilities. The cherry on top was that in converted 95% of that EBIT to free cash flow, bringing in US$54m. So we don't think iEnergizer's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for iEnergizer that you should be aware of before investing here.
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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