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Is Inchcape (LON:INCH) A Risky Investment?

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·4 min read
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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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Inchcape plc (LON:INCH) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Inchcape

What Is Inchcape's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Inchcape had UK£215.8m of debt in June 2022, down from UK£1.15b, one year before. However, its balance sheet shows it holds UK£654.8m in cash, so it actually has UK£439.0m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At Inchcape's Liabilities

The latest balance sheet data shows that Inchcape had liabilities of UK£2.19b due within a year, and liabilities of UK£711.9m falling due after that. Offsetting these obligations, it had cash of UK£654.8m as well as receivables valued at UK£461.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£1.79b.

Inchcape has a market capitalization of UK£3.14b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Inchcape also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Inchcape grew its EBIT by 30% in the last year, and that should make it easier to pay down debt, going forward. 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 Inchcape's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Inchcape 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. Happily for any shareholders, Inchcape actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Inchcape does have more liabilities than liquid assets, it also has net cash of UK£439.0m. And it impressed us with free cash flow of UK£373m, being 109% of its EBIT. So is Inchcape's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. 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 1 warning sign for Inchcape you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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