InfraCom Group (NGM:INFRA) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 InfraCom Group AB (publ) (NGM:INFRA) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for InfraCom Group

What Is InfraCom Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that InfraCom Group had kr34.8m of debt in December 2020, down from kr46.1m, one year before. However, its balance sheet shows it holds kr41.9m in cash, so it actually has kr7.18m net cash.

How Strong Is InfraCom Group's Balance Sheet?

We can see from the most recent balance sheet that InfraCom Group had liabilities of kr80.5m falling due within a year, and liabilities of kr22.1m due beyond that. Offsetting this, it had kr41.9m in cash and kr36.2m in receivables that were due within 12 months. So its liabilities total kr24.5m more than the combination of its cash and short-term receivables.

Given InfraCom Group has a market capitalization of kr719.4m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

In addition to that, we're happy to report that InfraCom Group has boosted its EBIT by 50%, thus reducing the spectre of future debt repayments. 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 InfraCom Group 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.

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. During the last three years, InfraCom Group generated free cash flow amounting to a very robust 93% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

We could understand if investors are concerned about InfraCom Group's liabilities, but we can be reassured by the fact it has has net cash of kr7.18m. And it impressed us with free cash flow of kr37m, being 93% of its EBIT. So is InfraCom Group'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 InfraCom Group that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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