Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We note that ICL Group Ltd. (TLV:ICL) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. 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. The first step when considering a company’s debt levels is to consider its cash and debt together.
See our latest analysis for ICL Group
What is the debt of the ICL group?
The image below, which you can click on for more details, shows that in December 2021, ICL Group had $2.66 billion in debt, up from $2.43 billion in one year. However, since it has a cash reserve of $564.0 million, its net debt is less, at around $2.10 billion.
How strong is the balance sheet of the ICL group?
We can see from the most recent balance sheet that the ICL group had liabilities of US$2.61 billion falling due within a year, and liabilities of US$3.73 billion due beyond . In compensation for these obligations, it had cash of US$564.0 million as well as receivables valued at US$1.68 billion and payable within 12 months. Thus, its liabilities total $4.10 billion more than the combination of its cash and short-term receivables.
This shortfall is not that bad as the ICL Group is worth US$16.4 billion and therefore could probably raise enough capital to shore up its balance sheet, should the need arise. However, it is always worth taking a close look at its ability to repay debt.
We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
ICL Group has a low net debt to EBITDA ratio of only 1.3. And its EBIT covers its interest charges 12.9 times. One could therefore say that he is no more threatened by his debt than an elephant is by a mouse. Even more impressive is the fact that ICL Group increased its EBIT by 253% year-over-year. If sustained, this growth will make debt even more manageable in years to come. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether ICL Group can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, ICL Group’s free cash flow has been 47% of its EBIT, less than we expected. This low cash conversion makes debt management more difficult.
Our point of view
The good news is that ICL Group’s demonstrated ability to cover its interest charges with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, since its EBIT growth rate also confirms this impression! Given all this data, it seems to us that ICL Group is taking a pretty sensible approach to debt. This means they take on a bit more risk, hoping to increase shareholder returns. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. For example ICL Group has 4 warning signs (and 1 that can’t be ignored) that we think you should know about.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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