These 4 metrics indicate that MGP Ingredients (NASDAQ: MGPI) is using debt reasonably well

Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss. of capital “. It is only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. We notice that Ingredients MGP, Inc. (NASDAQ: MGPI) has debt on its balance sheet. But should shareholders be concerned about its use of debt?

When is debt dangerous?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. 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 MGP ingredients

What is MGP Ingredients’ net debt?

You can click on the graph below for historical figures, but it shows that as of September 2021, MGP Ingredients had a debt of US $ 247.7 million, an increase from US $ 54.5 million. , over one year. However, it has $ 16.2 million in cash offsetting that, leading to net debt of around $ 231.5 million.

How strong is MGP Ingredients’ balance sheet?

We can see from the most recent balance sheet that MGP Ingredients had liabilities of US $ 86.5 million due within one year and liabilities of US $ 316.1 million due beyond. . On the other hand, it had US $ 16.2 million in cash and US $ 93.5 million in receivables due within one year. Its liabilities therefore total $ 292.9 million more than the combination of its cash and short-term receivables.

Considering that MGP Ingredients’ listed shares are worth a total of US $ 1.91 billion, it seems unlikely that this level of liabilities is a major threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.

We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its earnings before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). Thus, we look at debt versus earnings with and without amortization expenses.

MGP Ingredients’ net debt to EBITDA ratio of around 2.0 suggests moderate use of debt. And its strong coverage interest of 37.7 times, makes us even more comfortable. It should be noted that MGP Ingredients’ EBIT has jumped like bamboo after the rain, gaining 82% in the last twelve months. This will make it easier to manage your debt. When analyzing debt levels, the balance sheet is the obvious place to start. But ultimately, the company’s future profitability will decide whether MGP Ingredients can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, MGP Ingredients’ free cash flow has been 44% of its EBIT, less than we expected. It’s not great when it comes to paying down debt.

Our point of view

MGP Ingredients’ interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. And the good news doesn’t end there, as its EBIT growth rate also supports this impression! Considering all of this data, it seems to us that MGP Ingredients is taking a pretty sane approach to debt. This means that they are taking a bit more risk, in the hope of increasing shareholder returns. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 2 warning signs for MGP ingredients which you should know before investing here.

If you want to invest in companies that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.

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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 any stock 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 material. Simply Wall St has no position in any of the stocks mentioned.