We Think Integral Ad Science Holding (NASDAQ:IAS) Can Manage Its Debt With Ease

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Integral Ad Science Holding Corp. (NASDAQ:IAS) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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 Integral Ad Science Holding

What Is Integral Ad Science Holding's Net Debt?

As you can see below, Integral Ad Science Holding had US$64.1m of debt at September 2024, down from US$173.6m a year prior. However, it also had US$57.1m in cash, and so its net debt is US$6.99m.

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

Zooming in on the latest balance sheet data, we can see that Integral Ad Science Holding had liabilities of US$60.6m due within 12 months and liabilities of US$91.6m due beyond that. Offsetting this, it had US$57.1m in cash and US$129.6m in receivables that were due within 12 months. So it can boast US$34.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Integral Ad Science Holding could probably pay off its debt with ease, as its balance sheet is far from stretched. But either way, Integral Ad Science Holding has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (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).

With net debt at just 0.078 times EBITDA, it seems Integral Ad Science Holding only uses a little bit of leverage. Although with EBIT only covering interest expenses 6.9 times over, the company is truly paying for borrowing. Better yet, Integral Ad Science Holding grew its EBIT by 223% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 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 clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Integral Ad Science Holding actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

Happily, Integral Ad Science Holding's impressive conversion of EBIT to free cash flow implies it has the upper hand on its debt. And that's just the beginning of the good news since its EBIT growth rate is also very heartening. We think Integral Ad Science Holding is no more beholden to its lenders, than the birds are to birdwatchers. For investing nerds like us its balance sheet is almost charming. 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. Be aware that Integral Ad Science Holding is showing 1 warning sign in our investment analysis , you should know about...

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.