These 4 metrics indicate that Ingredion (NYSE:INGR) is using debt reasonably well
Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We notice that Ingredion Incorporated (NYSE:INGR) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
See our latest analysis for Ingredion
What is Ingredion’s debt?
As you can see below, Ingredion had $2.15 billion in debt as of September 2021, roughly the same as the previous year. You can click on the graph for more details. On the other hand, it has $438.0 million in cash, resulting in a net debt of around $1.71 billion.
How healthy is Ingredion’s balance sheet?
According to the last published balance sheet, Ingredion had liabilities of $1.46 billion maturing within 12 months and liabilities of $2.36 billion maturing beyond 12 months. On the other hand, it had liquidities of 438.0 million dollars and 1.04 billion dollars of receivables at less than one year. It therefore has liabilities totaling $2.34 billion more than its cash and short-term receivables, combined.
This shortfall is not that bad as Ingredion is worth $6.29 billion and therefore could probably raise enough capital to shore up its balance sheet, should the need arise. 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). Thus, we consider debt to earnings with and without depreciation and amortization charges.
We would say that Ingredion’s moderate net debt to EBITDA ratio (1.8) indicates prudence in terms of leverage. And its towering EBIT of 12.6 times its interest expense means that the debt burden is as light as a peacock feather. It is also relevant to note that Ingredion has increased its EBIT by a very respectable 23% over the past year, improving its ability to repay debt. When analyzing debt levels, the balance sheet is the obvious starting point. 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 want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, while the taxman may love accounting profits, lenders only accept cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Ingredion’s free cash flow has been 44% of its EBIT, less than we expected. This low cash conversion makes debt management more difficult.
Our point of view
Ingredion’s interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. And this is only the beginning of good news since its EBIT growth rate is also very encouraging. All told, it looks like Ingredion can comfortably manage its current level of debt. On the plus side, this leverage can increase shareholder returns, but the potential downside is greater risk of loss, so it’s worth keeping an eye on the balance sheet. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example – Ingredion has 4 warning signs we think you should know.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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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.