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.’ So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. We can see that IAC/InterActiveCorp (NASDAQ:IAC) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. 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. 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.
What Is IAC/InterActiveCorp’s Debt?
As you can see below, at the end of June 2019, IAC/InterActiveCorp had US$3.15b of debt, up from US$2.00b a year ago. Click the image for more detail. However, its balance sheet shows it holds US$3.31b in cash, so it actually has US$161.4m net cash.
How Strong Is IAC/InterActiveCorp’s Balance Sheet?
According to the last reported balance sheet, IAC/InterActiveCorp had liabilities of US$953.5m due within 12 months, and liabilities of US$3.42b due beyond 12 months. Offsetting these obligations, it had cash of US$3.31b as well as receivables valued at US$365.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$695.8m.
Of course, IAC/InterActiveCorp has a titanic market capitalization of US$21.3b, 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. While it does have liabilities worth noting, IAC/InterActiveCorp also has more cash than debt, so we’re pretty confident it can manage its debt safely.
Another good sign is that IAC/InterActiveCorp has been able to increase its EBIT by 29% in twelve months, making it easier to pay down debt. 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 IAC/InterActiveCorp 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, a business needs free cash flow to pay off debt; accounting profits just don’t cut it. While IAC/InterActiveCorp 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. Happily for any shareholders, IAC/InterActiveCorp actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
While it is always sensible to look at a company’s total liabilities, it is very reassuring that IAC/InterActiveCorp has US$161m in net cash. The cherry on top was that in converted 120% of that EBIT to free cash flow, bringing in US$842m. So we don’t think IAC/InterActiveCorp’s use of debt is risky. We’d be very excited to see if IAC/InterActiveCorp insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.
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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