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.' 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. As with many other companies InfraCom Group AB (publ) (NGM:INFRA) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
Check out the opportunities and risks within the SE IT industry.
How Much Debt Does InfraCom Group Carry?
As you can see below, InfraCom Group had kr22.4m of debt at June 2022, down from kr38.7m a year prior. However, it does have kr27.3m in cash offsetting this, leading to net cash of kr4.89m.
How Strong Is InfraCom Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that InfraCom Group had liabilities of kr85.0m due within 12 months and liabilities of kr28.2m due beyond that. Offsetting these obligations, it had cash of kr27.3m as well as receivables valued at kr28.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr57.2m.
Since publicly traded InfraCom Group shares are worth a total of kr814.1m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, InfraCom Group also has more cash than debt, so we're pretty confident it can manage its debt safely.
Also good is that InfraCom Group grew its EBIT at 15% over the last year, further increasing its ability to manage debt. 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 InfraCom Group'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While InfraCom Group 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 three years, InfraCom Group recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
Summing Up
While it is always sensible to look at a company's total liabilities, it is very reassuring that InfraCom Group has kr4.89m in net cash. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in kr60m. So is InfraCom Group's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that InfraCom Group is showing 3 warning signs in our investment analysis , you should know about...
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. 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.
About NGM:INFRA
Outstanding track record with flawless balance sheet.