Is Integral Ad Science Holding (NASDAQ:IAS) A Risky Investment?

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 can see that Integral Ad Science Holding Corp. (NASDAQ:IAS) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Integral Ad Science Holding

What Is Integral Ad Science Holding's Debt?

The image below, which you can click on for greater detail, shows that Integral Ad Science Holding had debt of US$94.0m at the end of June 2024, a reduction from US$193.5m over a year. However, because it has a cash reserve of US$70.6m, its net debt is less, at about US$23.4m.

How Strong Is Integral Ad Science Holding's Balance Sheet?

The latest balance sheet data shows that Integral Ad Science Holding had liabilities of US$61.1m due within a year, and liabilities of US$135.4m falling due after that. Offsetting this, it had US$70.6m in cash and US$120.6m in receivables that were due within 12 months. So it has liabilities totalling US$5.39m more than its cash and near-term receivables, combined.

Having regard to Integral Ad Science Holding's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$1.75b company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, Integral Ad Science Holding has a very light debt load indeed.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

While Integral Ad Science Holding's low debt to EBITDA ratio of 0.28 suggests only modest use of debt, the fact that EBIT only covered the interest expense by 4.8 times last year does give us pause. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. Pleasingly, Integral Ad Science Holding is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 237% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Integral Ad Science Holding 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. So we always check how much of that EBIT is translated into free cash flow. Happily for any shareholders, Integral Ad Science Holding actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

The good news is that Integral Ad Science Holding's demonstrated ability to convert EBIT to free cash flow delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its EBIT growth rate also supports that impression! Considering this range of factors, it seems to us that Integral Ad Science Holding is quite prudent with its debt, and the risks seem well managed. So the balance sheet looks pretty healthy, to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Integral Ad Science Holding has 3 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.