Here's Why IAR Systems Group (STO:IAR B) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, IAR Systems Group AB (publ) (STO:IAR B) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for IAR Systems Group

What Is IAR Systems Group's Debt?

You can click the graphic below for the historical numbers, but it shows that IAR Systems Group had kr17.8m of debt in March 2021, down from kr30.2m, one year before. But on the other hand it also has kr66.8m in cash, leading to a kr49.0m net cash position.

How Healthy Is IAR Systems Group's Balance Sheet?

According to the last reported balance sheet, IAR Systems Group had liabilities of kr157.9m due within 12 months, and liabilities of kr66.6m due beyond 12 months. Offsetting these obligations, it had cash of kr66.8m as well as receivables valued at kr61.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr96.3m.

Of course, IAR Systems Group has a market capitalization of kr1.96b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, IAR Systems Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, IAR Systems Group saw its EBIT drop by 5.3% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if IAR Systems 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While IAR Systems 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. In the last three years, IAR Systems Group's free cash flow amounted to 31% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that IAR Systems Group has kr49.0m in net cash. So we are not troubled with IAR Systems Group's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that IAR Systems Group insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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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