Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. Like many other companies IQVIA Holdings Inc. (NYSE: IQV) uses debt. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider both liquidity and debt levels.
What is the net debt of IQVIA Holdings?
As you can see below, IQVIA Holdings had $ 12.3 billion in debt, as of June 2021, which is roughly the same as the year before. You can click on the graph for more details. However, given that it has a cash reserve of US $ 1.91 billion, its net debt is less, at around US $ 10.4 billion.
NYSE: IQV Debt to Equity History October 17, 2021
A look at the liabilities of IQVIA Holdings
We can see from the most recent balance sheet that IQVIA Holdings had liabilities of US $ 4.82 billion maturing within one year and liabilities of US $ 13.4 billion maturing within one year. of the. On the other hand, he had $ 1.91 billion in cash and $ 2.35 billion in receivables within a year. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 13.9 billion.
This deficit is not that big as IQVIA Holdings is worth US $ 47.7 billion and could therefore probably raise enough capital to consolidate its balance sheet, should the need arise. But we absolutely want to keep our eyes open for indications that its debt is too risky.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
IQVIA Holdings’ debt is 4.7 times its EBITDA, and its EBIT covers its interest expense 3.0 times more. This suggests that while debt levels are significant, we would stop calling them problematic. Looking on the bright side, IQVIA Holdings has grown its EBIT silky 60% over the past year. Like a mother’s loving embrace for a newborn baby, this type of growth builds resilience, putting the business in a stronger position to manage debt. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether IQVIA Holdings can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, a business can only repay its debts with hard cash, not with book profits. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, IQVIA Holdings has actually generated more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.
Our point of view
The conversion of IQVIA Holdings’ EBIT to free cash flow suggests that it can manage its debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. But we have to admit that we find that its net debt to EBITDA has the opposite effect. All these things considered, it looks like IQVIA Holdings can comfortably manage its current debt levels. On the plus side, this leverage can increase returns to shareholders, but the potential downside is more risk of loss, so it’s worth watching the balance sheet. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 2 warning signs for IQVIA Holdings (1 is significant!) That you should know before investing here.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash-flow-growing stocks today.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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