We believe Induct Software (OB: INDCT) is taking risks with its debt
Warren Buffett said: “Volatility is far from synonymous with risk”. So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. Above all, Induct Software AS (OB: INDCT) carries the debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider both liquidity and debt levels.
Check out our latest review for Induct Software
What is Induct Software’s debt?
You can click on the graph below for historical figures, but it shows that as of June 2021, Induct Software had a debt of 16.5 million kr, an increase from 9.86 million kr, on a year. However, given that it has a cash reserve of 3.50 million kr, its net debt is less, at around 13.0 million kr.
How strong is Induct Software’s balance sheet?
We can see from the most recent balance sheet that Induct Software had a liability of kr 3.61 million due within one year and a liability of kr 16.5 million due thereafter. In return, he had 3.50 million kr in cash and 4.49 million kr in receivables due within 12 months. It therefore has liabilities totaling 12.1 million kr more than its combined cash and short-term receivables.
Given that Induct Software has a market cap of 95.5 million crowns, it’s hard to believe that these liabilities pose a significant threat. Having said that, it is clear that we must continue to monitor his record lest it get worse.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). Thus, we consider debt versus earnings with and without amortization charges.
Low interest coverage of 0.19 times and an unusually high net debt to EBITDA ratio of 6.7 hit our confidence in Induct Software like a punch in the gut. This means that we would consider him to be in heavy debt. A buyout factor for Induct Software is that it turned last year’s loss of EBIT into a gain of 242,000 kr, over the past twelve months. When analyzing debt levels, the balance sheet is the obvious starting point. But it is Induct Software’s profits that will influence the way the balance sheet is held in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. It is therefore important to check to what extent its earnings before interest and taxes (EBIT) are converted into actual free cash flow. Considering the past year, Induct Software actually had a cash outflow overall. Debt is much riskier for companies with unreliable free cash flow, so shareholders should hope that past spending will produce free cash flow in the future.
Our point of view
At first glance, Induct Software’s net debt to EBITDA left us hesitant about the stock, and its interest coverage was no more attractive than the only empty restaurant on the busiest night of the year. . That said, his ability to manage his total liabilities isn’t that much of a concern. Looking at the balance sheet and taking all of these factors into account, we think debt makes Induct Software’s stock a bit risky. This isn’t necessarily a bad thing, but we would generally feel more comfortable with less leverage. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. For example – Induct Software has 4 warning signs we think you should be aware.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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