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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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that IAMGOLD Corporation (TSE:IMG) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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, at the end of June 2021, IAMGOLD had US$456.5m of debt, up from US$411.0m a year ago. Click the image for more detail. But on the other hand it also has US$829.8m in cash, leading to a US$373.3m net cash position.
A Look At IAMGOLD's Liabilities
We can see from the most recent balance sheet that IAMGOLD had liabilities of US$468.2m falling due within a year, and liabilities of US$1.16b due beyond that. On the other hand, it had cash of US$829.8m and US$71.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$731.9m.
This deficit is considerable relative to its market capitalization of US$1.17b, so it does suggest shareholders should keep an eye on IAMGOLD's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, IAMGOLD also has more cash than debt, so we're pretty confident it can manage its debt safely.
Although IAMGOLD made a loss at the EBIT level, last year, it was also good to see that it generated US$177m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if IAMGOLD can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.
While IAMGOLD does have more liabilities than liquid assets, it also has net cash of US$373.3m. So although we see some areas for improvement, we're not too worried about IAMGOLD's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for IAMGOLD you should know about.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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