We believe IMCD (AMS: IMCD) can manage its debt with ease
David Iben put it well when he said: âVolatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies IMCD SA (AMS: IMCD) uses debt. But should shareholders be concerned about its use of debt?
When Is Debt a Problem?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
Check out our latest analysis for IMCD
What is IMCD’s debt?
As you can see below, at the end of June 2021, IMCD had 955.1 million euros in debt, up from 873.4 million euros a year ago. Click on the image for more details. However, because it has a cash reserve of â¬ 138.4 million, its net debt is lower, at around â¬ 816.8 million.
A look at IMCD’s responsibilities
We can see from the most recent balance sheet that IMCD had liabilities of 949.1 million euros maturing within one year and liabilities of 669.0 million euros beyond. In compensation for these commitments, he had cash of â¬ 138.4 million as well as receivables valued at â¬ 615.8 million within 12 months. It therefore has total liabilities of â¬ 863.9 million more than its combined cash and short-term receivables.
Of course, IMCD has a titanic market cap of 10.9 billion euros, so this liability is probably manageable. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.
We measure a company’s debt load relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). 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).
IMCD has a debt to EBITDA ratio of 2.6, which signals significant debt, but is still reasonable enough for most types of businesses. But its EBIT was around 13.8 times its interest expense, implying that the company isn’t really paying a high cost to maintain that level of debt. Even if the low cost turned out to be unsustainable, that’s a good sign. It should be noted that IMCD’s EBIT has soared like bamboo after the rain, gaining 37% in the past twelve months. This will make it easier to manage your debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether IMCD can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, IMCD has recorded free cash flow totaling 87% of its EBIT, which is higher than what we normally expected. This positions it well to repay debt if it is desirable.
Our point of view
The good news is that IMCD’s demonstrated ability to cover its interest costs with its EBIT delights us like a fluffy puppy does a toddler. But, on a darker note, we’re a little concerned about its net debt to EBITDA. Overall, we don’t think IMCD is taking bad risks, as its leverage appears modest. We are therefore not worried about the use of a small leverage on the balance sheet. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for IMCD you should know.
At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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 material. Simply Wall St has no position in any of the stocks mentioned.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.