IAR Systems Group (STO:IAR B) Seems To Use Debt Quite Sensibly

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.' 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. As with many other companies IAR Systems Group AB (publ) (STO:IAR B) makes use of debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

View our latest analysis for IAR Systems Group

How Much Debt Does IAR Systems Group Carry?

As you can see below, IAR Systems Group had kr18.0m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has kr91.3m in cash to offset that, meaning it has kr73.3m net cash.

How Healthy Is IAR Systems Group's Balance Sheet?

According to the last reported balance sheet, IAR Systems Group had liabilities of kr157.5m due within 12 months, and liabilities of kr63.4m due beyond 12 months. On the other hand, it had cash of kr91.3m and kr55.6m worth of receivables due within a year. So it has liabilities totalling kr74.0m more than its cash and near-term receivables, combined.

Since publicly traded IAR Systems Group shares are worth a total of kr1.45b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, IAR Systems Group boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for IAR Systems Group if management cannot prevent a repeat of the 27% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 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. Looking at the most recent three years, IAR Systems Group recorded free cash flow of 40% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

We could understand if investors are concerned about IAR Systems Group's liabilities, but we can be reassured by the fact it has has net cash of kr73.3m. So we are not troubled with IAR Systems Group's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in IAR Systems Group, you may well want to click here to check an interactive graph of its earnings per share history.

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.