These 4 metrics indicate that Ingredion (NYSE:INGR) is using debt reasonably well

Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We can see that Ingredion Incorporated (NYSE:INGR) uses debt in its operations. But the real question is whether this debt makes the business risky.

When is debt dangerous?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.

See our latest analysis for Ingredion

What is Ingredion’s net debt?

As you can see below, Ingredion had $2.25 billion in debt as of March 2022, roughly the same as the previous year. You can click on the graph for more details. However, since it has a cash reserve of $329.0 million, its net debt is lower, at around $1.92 billion.

NYSE:INGR Debt to Equity June 11, 2022

A look at Ingredion’s responsibilities

According to the last published balance sheet, Ingredion had liabilities of $1.72 billion maturing within 12 months and liabilities of $2.33 billion maturing beyond 12 months. In return, it had $329.0 million in cash and $1.27 billion in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and (current) receivables by $2.46 billion.

While that might sound like a lot, it’s not too bad since Ingredion has a market capitalization of $5.95 billion, so it could probably bolster its balance sheet by raising capital if needed. However, it is always worth taking a close look at its ability to repay debt.

We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).

With a debt to EBITDA ratio of 2.1, Ingredion uses debt wisely but responsibly. And the fact that its trailing twelve months EBIT was 8.9 times its interest expense aligns with that theme. Ingredion has increased its EBIT by 3.2% over the past year. It’s far from amazing, but it’s a good thing when it comes to paying down debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Ingredion’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the last three years, Ingredion has recorded a free cash flow of 41% of its EBIT, which is lower than expected. This low cash conversion makes debt management more difficult.

Our point of view

Based on our analysis, Ingredion’s interest coverage should signal that it won’t have too many problems with its debt. But the other factors we noted above weren’t so encouraging. For example, his level of total liabilities makes us a little nervous about his debt. When we consider all the factors mentioned above, we feel a bit cautious about Ingredion’s use of debt. While we understand that debt can improve returns on equity, we suggest shareholders keep a close eye on their level of debt, lest it increase. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Know that Ingredion shows 2 warning signs in our investment analysis and 1 of them cannot be ignored…

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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