Is International Distributions Services (LON:IDS) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 International Distributions Services plc (LON:IDS) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for International Distributions Services

How Much Debt Does International Distributions Services Carry?

The image below, which you can click on for greater detail, shows that at March 2023 International Distributions Services had debt of UK£1.04b, up from UK£934.0m in one year. However, it also had UK£898.0m in cash, and so its net debt is UK£138.0m.

How Strong Is International Distributions Services' Balance Sheet?

We can see from the most recent balance sheet that International Distributions Services had liabilities of UK£2.60b falling due within a year, and liabilities of UK£2.41b due beyond that. Offsetting these obligations, it had cash of UK£898.0m as well as receivables valued at UK£1.44b due within 12 months. So its liabilities total UK£2.67b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of UK£2.22b, we think shareholders really should watch International Distributions Services's debt levels, like a parent watching their child ride a bike for the first time. 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 ultimately the future profitability of the business will decide if International Distributions Services can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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 5.3%. 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£31m. 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. Not least because it had negative free cash flow of UK£54m over the last twelve months. That means it's on the risky side of things. For riskier companies like International Distributions Services I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.