Warren Buffett famously said, '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. We can see that The Interpublic Group of Companies, Inc. (NYSE:IPG) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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 think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Interpublic Group of Companies Carry?
You can click the graphic below for the historical numbers, but it shows that Interpublic Group of Companies had US$2.96b of debt in December 2021, down from US$3.47b, one year before. However, it does have US$3.27b in cash offsetting this, leading to net cash of US$313.2m.
A Look At Interpublic Group of Companies' Liabilities
We can see from the most recent balance sheet that Interpublic Group of Companies had liabilities of US$10.9b falling due within a year, and liabilities of US$5.41b due beyond that. Offsetting these obligations, it had cash of US$3.27b as well as receivables valued at US$7.52b due within 12 months. So its liabilities total US$5.51b more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Interpublic Group of Companies has a huge market capitalization of US$14.3b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Interpublic Group of Companies also has more cash than debt, so we're pretty confident it can manage its debt safely.
In addition to that, we're happy to report that Interpublic Group of Companies has boosted its EBIT by 44%, thus reducing the spectre of future debt repayments. 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 Interpublic Group of Companies 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Interpublic Group of Companies 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, Interpublic Group of Companies 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.
Although Interpublic Group of Companies's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$313.2m. The cherry on top was that in converted 137% of that EBIT to free cash flow, bringing in US$1.9b. So we don't think Interpublic Group of Companies's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Interpublic Group of Companies you should be aware of.
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.
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.