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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 IAR Systems Group AB (publ) (STO:IAR B) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for IAR Systems Group

What Is IAR Systems Group's Net Debt?

The chart below, which you can click on for greater detail, shows that IAR Systems Group had kr18.0m in debt in December 2021; about the same as the year before. However, it does have kr113.4m in cash offsetting this, leading to net cash of kr95.4m.

How Strong Is IAR Systems Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that IAR Systems Group had liabilities of kr178.5m due within 12 months and liabilities of kr49.0m due beyond that. Offsetting these obligations, it had cash of kr113.4m as well as receivables valued at kr88.7m due within 12 months. So it has liabilities totalling kr25.4m more than its cash and near-term receivables, combined.

This state of affairs indicates that IAR Systems Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the kr1.70b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, IAR Systems Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact IAR Systems Group's saving grace is its low debt levels, because its EBIT has tanked 34% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if IAR Systems Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 42% 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 kr95.4m 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.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.