Li Lu, an external fund manager backed by Berkshire Hathaway's Charlie Munger, says, “The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.'' It has even been stated. In other words, financially smart people seem to know that debt (usually associated with bankruptcy) is a very important factor when assessing a company's risk. Points to keep in mind are: International Game Technology PLC (NYSE:IGT) has debt on its balance sheet. But the real question is whether this debt is putting the company at risk.

When is debt dangerous?

Debt and other liabilities become a risk to a company if it cannot easily meet those obligations through free cash flow or by raising capital at an attractive price. In the worst case scenario, a company may go bankrupt if it is unable to pay its creditors. But a more common (but still expensive) situation is when a company needs to dilute shareholders at a cheap share price just to manage its debt. The advantage of debt, of course, is that it is often cheap capital, especially when it replaces dilution in a company that can be reinvested at a high rate of return. When we think about a company's use of debt, we first think of cash and debt together.

Check out our latest analysis on International Gaming Technology.

What is International Game Technology's net debt?

The graph below, which you can click on for greater detail, shows that International Game Technology had debt of US$5.68b at December 2023. Almost the same as last year. However, it has cash reserves of US$572m, so its net debt is less than that, at around US$5.11b.

NYSE:IGT Debt to Equity Transition April 25, 2024

Looking back at the responsibilities of international game technology

Zooming in on the latest balance sheet data, we can see that International Game Technology had liabilities of US$1.73b due within 12 months, and liabilities of US$6.9b due beyond that. On the other hand, it had cash of US$572m and receivables worth US$964m that were due within a year. So its liabilities outweigh the sum of its cash and (short-term) receivables by US$7.1b.

The flaws here weigh on the US$4.11 billion company itself, like a child struggling under the weight of a giant backpack full of books, sports equipment, and a trumpet. So we definitely think shareholders need to monitor this closely. After all, if creditors demand repayment, International Game Technology will likely need a major recapitalization.

We look at net debt divided by earnings before interest, tax, depreciation and amortization (EBITDA) and calculate how easily a company's earnings before interest, tax, depreciation and amortization (EBITDA) cover its interest. Measure a company's debt load. Expenses (interest burden). The advantage of this approach is that it takes into account both the absolute amount of debt (net debt to EBITDA) and the actual interest expense associated with that debt (interest cover ratio).

International Game Technology has a debt-to-EBITDA ratio of 3.2, with its EBIT covering its interest expense 3.5 times. Taken together, this means that while we don't want higher debt levels, we think the current leverage can be managed. However, one saving factor is that International Game Technology grew its EBIT by 11% in the last twelve months, increasing its ability to service its debt. The balance sheet is clearly the area to focus on when analyzing debt. But more than anything, it will be future earnings that will determine whether International Game Technology can maintain a healthy balance sheet going forward.If you're focused on the future, check this out free A report showing analyst profit forecasts.

Finally, companies can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, International Game Technology generated solid free cash flow representing 72% of its EBIT. This is about as expected. This cold cash means it can reduce debt if needed.

our view

I would go so far as to say that International Game Technology's total debt levels were disappointing. But at least it's pretty decent at converting EBIT to free cash flow. That's encouraging. Considering all of the above factors together, it seems that International Game Technology's debt poses some risk. That's not necessarily a bad thing, but I generally feel more comfortable with lower leverage. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, any company can contain risks that exist outside the balance sheet. For example, International Game Technology 3 warning signs (and #1 is a little off-putting) but I think you should know.

After all, it may be easier to focus on companies that don't even need to take on debt.Readers can access a list of growth stocks with zero net debt completely freeright now.

Valuation is complex, but we help make it simple.

Check out our comprehensive analysis, including: Is International Gaming Technology potentially overvalued or undervalued? Fair value estimates, risks and caveats, dividends, insider trading, and financial health.

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

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