Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Invacare Corporation (NYSE:IVC) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Invacare's Debt?
You can click the graphic below for the historical numbers, but it shows that Invacare had US$233.4m of debt in June 2019, down from US$249.0m, one year before. However, because it has a cash reserve of US$89.5m, its net debt is less, at about US$143.9m.
A Look At Invacare's Liabilities
According to the last reported balance sheet, Invacare had liabilities of US$193.9m due within 12 months, and liabilities of US$341.8m due beyond 12 months. Offsetting this, it had US$89.5m in cash and US$139.8m in receivables that were due within 12 months. So its liabilities total US$306.3m more than the combination of its cash and short-term receivables.
When you consider that this deficiency exceeds the company's US$249.5m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 Invacare'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.
Over 12 months, Invacare made a loss at the EBIT level, and saw its revenue drop to US$948m, which is a fall of 3.7%. We would much prefer see growth.
Importantly, Invacare had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost US$9.6m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$29m in negative free cash flow over the last year. That means it's on the risky side of things. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Invacare insider transactions.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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