Does International Distributions Services (LON:IDS) Have A Healthy Balance Sheet?

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.' 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. Importantly, International Distributions Services plc (LON:IDS) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for International Distributions Services

What Is International Distributions Services's Debt?

As you can see below, at the end of September 2023, International Distributions Services had UK£1.60b of debt, up from UK£933.0m a year ago. Click the image for more detail. However, because it has a cash reserve of UK£1.50b, its net debt is less, at about UK£101.0m.

How Healthy Is International Distributions Services' Balance Sheet?

We can see from the most recent balance sheet that International Distributions Services had liabilities of UK£3.04b falling due within a year, and liabilities of UK£2.81b due beyond that. On the other hand, it had cash of UK£1.50b and UK£1.58b worth of receivables due within a year. So it has liabilities totalling UK£2.77b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's UK£2.61b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine International Distributions Services's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, International Distributions Services made a loss at the EBIT level, and saw its revenue drop to UK£12b, which is a fall of 3.3%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months International Distributions Services produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at UK£107m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of UK£1.0b didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how International Distributions Services's profit, revenue, and operating cashflow have changed over the last few years.

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.