Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies International Game Technology PLC (NYSE: IGT) uses debt. But does this debt worry shareholders?
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. 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. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Check out our latest review for International Game Technology
What is International Game Technology’s debt?
As you can see below, International Game Technology had $ 6.96 billion in debt in June 2021, up from $ 8.64 billion the year before. However, he also had $ 639.0 million in cash, so his net debt is $ 6.32 billion.
A look at the responsibilities of International Game Technology
According to the latest published balance sheet, International Game Technology had liabilities of US $ 2.02 billion due within 12 months and liabilities of US $ 7.94 billion due beyond 12 months. On the other hand, he had cash of US $ 639.0 million and receivables of US $ 1.26 billion within a year. Its liabilities therefore total $ 8.06 billion more than the combination of its cash and short-term receivables.
When you consider that this deficit exceeds the company’s US $ 6.01 billion market cap, you may well be inclined to take a close look at the balance sheet. In the scenario where the company had to clean up its balance sheet quickly, it seems likely that shareholders would suffer a significant dilution.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). Thus, we consider debt versus earnings with and without amortization charges.
International Game Technology shareholders are faced with the double whammy of a high net debt / EBITDA ratio (5.2) and relatively low interest coverage, since EBIT is only 1.7 times interest charges. This means that we would consider him to be in heavy debt. However, shareholders should remember that International Game Technology has actually increased its EBIT by 181% over the past 12 months. If this earnings trend continues, its debt load will be much more manageable in the future. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether International Game Technology can strengthen its balance sheet over time. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.
Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, International Game Technology has recorded free cash flow of 78% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This free cash flow puts the business in a good position to repay debt, if any.
Our point of view
We feel some trepidation about covering International Game Technology’s difficulty interests, but we also have some bright spots to focus on. For example, its EBIT growth rate and the conversion of EBIT to free cash flow give us some confidence in its ability to manage its debt. When we consider all the factors discussed, it seems to us that International Game Technology is taking risks with its use of debt. While this debt may increase returns, we believe the company now has sufficient 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. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for International Game Technology you should know.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
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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