We Think 4iG Nyrt (BUSE:4IG) Can Manage Its Debt With Ease

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.' 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 note that 4iG Nyrt. (BUSE:4IG) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for 4iG Nyrt

How Much Debt Does 4iG Nyrt Carry?

As you can see below, at the end of December 2020, 4iG Nyrt had Ft3.02b of debt, up from Ft1.50b a year ago. Click the image for more detail. But on the other hand it also has Ft7.62b in cash, leading to a Ft4.60b net cash position.

How Healthy Is 4iG Nyrt's Balance Sheet?

The latest balance sheet data shows that 4iG Nyrt had liabilities of Ft29.1b due within a year, and liabilities of Ft1.11b falling due after that. Offsetting this, it had Ft7.62b in cash and Ft22.9b in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to 4iG Nyrt's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the Ft58.9b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, 4iG Nyrt boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that 4iG Nyrt has been able to increase its EBIT by 28% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine 4iG Nyrt'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While 4iG Nyrt 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. Over the most recent three years, 4iG Nyrt recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case 4iG Nyrt has Ft4.60b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 28% over the last year. So is 4iG Nyrt'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. For example, we've discovered 3 warning signs for 4iG Nyrt (1 shouldn't be ignored!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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