Yahoo Finance These 4 Measures Indicate That Indivior (LON:INDV) Is Using Debt Safely
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Indivior PLC (LON:INDV) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Indivior
What Is Indivior's Net Debt?
As you can see below, Indivior had US$242.0m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$1.00b in cash offsetting this, leading to net cash of US$758.0m.
How Healthy Is Indivior's Balance Sheet?
The latest balance sheet data shows that Indivior had liabilities of US$633.0m due within a year, and liabilities of US$805.0m falling due after that. Offsetting this, it had US$1.00b in cash and US$178.0m in receivables that were due within 12 months. So its liabilities total US$260.0m more than the combination of its cash and short-term receivables.
Given Indivior has a market capitalization of US$2.44b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Indivior boasts net cash, so it's fair to say it does not have a heavy debt load!
Even more impressive was the fact that Indivior grew its EBIT by 337% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Indivior 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. Indivior 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, Indivior produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing up
While Indivior does have more liabilities than liquid assets, it also has net cash of US$758.0m. And it impressed us with its EBIT growth of 337% over the last year. So is Indivior's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 3 warning signs we've spotted with Indivior .
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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