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.' 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. Importantly, IES Holdings, Inc. (NASDAQ:IESC) does carry debt. But is this debt a concern to shareholders?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is IES Holdings's Debt?
The image below, which you can click on for greater detail, shows that at December 2020 IES Holdings had debt of US$3.03m, up from US$319.0k in one year. But on the other hand it also has US$27.3m in cash, leading to a US$24.3m net cash position.
How Strong Is IES Holdings' Balance Sheet?
According to the last reported balance sheet, IES Holdings had liabilities of US$249.0m due within 12 months, and liabilities of US$52.3m due beyond 12 months. On the other hand, it had cash of US$27.3m and US$280.5m worth of receivables due within a year. So it actually has US$6.50m more liquid assets than total liabilities.
This state of affairs indicates that IES Holdings' 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 US$993.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that IES Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.
In addition to that, we're happy to report that IES Holdings has boosted its EBIT by 36%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is IES Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. IES Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, IES Holdings recorded free cash flow worth a fulsome 93% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
While it is always sensible to investigate a company's debt, in this case IES Holdings has US$24.3m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 93% of that EBIT to free cash flow, bringing in US$81m. So we don't think IES Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with IES Holdings (including 1 which is a bit concerning) .
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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What are the risks and opportunities for IES Holdings?
Price-To-Earnings ratio (21.7x) is below the Construction industry average (21.9x)
Profit margins (1.7%) are lower than last year (4%)
Large one-off items impacting financial results
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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