David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies ICON Public Limited Company (NASDAQ:ICLR) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is ICON's Debt?
As you can see below, ICON had US$349.5m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. However, it does have US$431.3m in cash offsetting this, leading to net cash of US$81.8m.
A Look At ICON's Liabilities
Zooming in on the latest balance sheet data, we can see that ICON had liabilities of US$708.8m due within 12 months and liabilities of US$481.4m due beyond that. On the other hand, it had cash of US$431.3m and US$994.8m worth of receivables due within a year. So it actually has US$235.9m more liquid assets than total liabilities.
This surplus suggests that ICON has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, ICON boasts net cash, so it's fair to say it does not have a heavy debt load!
And we also note warmly that ICON grew its EBIT by 12% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine ICON's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. ICON may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, ICON produced sturdy free cash flow equating to 74% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
While we empathize with investors who find debt concerning, you should keep in mind that ICON has net cash of US$81.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$257m, being 74% of its EBIT. So we don't think ICON's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in ICON, you may well want to click here to check an interactive graph of its earnings per share history.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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