Is IG Port (TYO:3791) Using Too Much Debt?

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.' 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 note that IG Port, Inc. (TYO:3791) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for IG Port

What Is IG Port's Debt?

The image below, which you can click on for greater detail, shows that IG Port had debt of JP¥200.0m at the end of November 2020, a reduction from JP¥212.0m over a year. However, its balance sheet shows it holds JP¥5.08b in cash, so it actually has JP¥4.88b net cash.

A Look At IG Port's Liabilities

We can see from the most recent balance sheet that IG Port had liabilities of JP¥6.18b falling due within a year, and liabilities of JP¥230.0m due beyond that. Offsetting these obligations, it had cash of JP¥5.08b as well as receivables valued at JP¥1.18b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥146.0m.

Having regard to IG Port's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the JP¥8.29b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, IG Port also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, IG Port grew its EBIT by 174% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 IG Port's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While IG Port 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 last two years, IG Port actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

We could understand if investors are concerned about IG Port's liabilities, but we can be reassured by the fact it has has net cash of JP¥4.88b. The cherry on top was that in converted 199% of that EBIT to free cash flow, bringing in JP¥1.2b. So we don't think IG Port's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that IG Port is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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