These 4 Measures Indicate That Indivior (LON:INDV) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Indivior PLC (LON:INDV) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Indivior

How Much Debt Does Indivior Carry?

As you can see below, Indivior had US$240.0m of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$934.0m in cash, leading to a US$694.0m net cash position.

How Strong Is Indivior's Balance Sheet?

We can see from the most recent balance sheet that Indivior had liabilities of US$787.0m falling due within a year, and liabilities of US$703.0m due beyond that. On the other hand, it had cash of US$934.0m and US$212.0m worth of receivables due within a year. So its liabilities total US$344.0m more than the combination of its cash and short-term receivables.

Of course, Indivior has a market capitalization of US$2.56b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Indivior boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Indivior has increased its EBIT by 2.8% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Indivior'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 report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Indivior has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Indivior's free cash flow amounted to 42% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Indivior does have more liabilities than liquid assets, it also has net cash of US$694.0m. On top of that, it increased its EBIT by 2.8% in the last twelve months. So we are not troubled with Indivior's debt use. We'd be motivated to research the stock further if we found out that Indivior insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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