Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 IAMGOLD Corporation (TSE:IMG) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does IAMGOLD Carry?
As you can see below, IAMGOLD had US$411.0m of debt, at June 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$838.1m in cash offsetting this, leading to net cash of US$427.1m.
How Strong Is IAMGOLD's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that IAMGOLD had liabilities of US$304.9m due within 12 months and liabilities of US$1.21b due beyond that. Offsetting this, it had US$838.1m in cash and US$76.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$604.4m.
This deficit isn't so bad because IAMGOLD is worth US$1.85b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, IAMGOLD boasts net cash, so it's fair to say it does not have a heavy debt load!
It was also good to see that despite losing money on the EBIT line last year, IAMGOLD turned things around in the last 12 months, delivering and EBIT of US$30m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine IAMGOLD'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While IAMGOLD 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. Over the last year, IAMGOLD actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
While IAMGOLD does have more liabilities than liquid assets, it also has net cash of US$427.1m. And it impressed us with free cash flow of US$165m, being 556% of its EBIT. So we are not troubled with IAMGOLD's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - IAMGOLD has 1 warning sign we think you should be aware of.
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.
This article by Simply Wall St is general in nature. 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.
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