Does the IWG (LON: IWG) use debt in a risky way?

David Iben put it well when he said: “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We note that IWG plc (LON: IWG) has debt on its balance sheet. But does this debt concern shareholders?

What risk does debt entail?

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. 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 he must raise new equity at low cost, thereby diluting shareholders over the long term. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

See our latest review for IWG

How much debt does IWG carry?

As you can see below, at the end of June 2021 IWG had £ 505.5million in debt, up from £ 378.8million a year ago. Click on the image for more details. However, he has £ 90.9million in cash offsetting this, leading to net debt of around £ 414.6million.

LSE: IWG History of debt to equity November 9, 2021

A look at IWG’s responsibilities

According to the latest published balance sheet, IWG had liabilities of £ 2.12 billion due within 12 months and liabilities of £ 5.99 billion due beyond 12 months. In compensation for these obligations, it had cash of £ 90.9 million as well as receivables valued at £ 718.8 million maturing within 12 months. Its liabilities therefore total £ 7.29 billion more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the £ 3.12 billion company like a towering colossus of mere mortals. We therefore believe that shareholders should watch it closely. After all, IWG would likely need a major recapitalization if it were to pay its creditors today. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine IWG’s ability to maintain a healthy balance sheet going forward. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Over 12 months, IWG recorded a loss in EBIT and saw revenue drop to £ 2.2 billion, a decrease of 17%. We would much prefer to see the growth.

Emptor Warning

While IWG’s drop in revenue is about as comforting as a wet blanket, its earnings before interest and taxes (EBIT) can be said to be even less attractive. Indeed, it lost £ 32million in EBIT. When we look at this alongside the material liabilities, we’re not particularly confident in the business. We would like to see big improvements in the short term before we get too interested in the title. For example, we wouldn’t want to see a repeat of last year’s £ 582million loss. And until then, we believe it is a risky move. When I consider a company to be a bit risky, I think it is their responsibility to check if any insiders have reported any sales of shares. Fortunately, you can click here to view our chart depicting IWG Insider Trading.

At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.

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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