Heidrick & Struggles International (NASDAQ:HSII) Seems To Use Debt Quite Sensibly
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Heidrick & Struggles International, Inc. (NASDAQ:HSII) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Heidrick & Struggles International
What Is Heidrick & Struggles International's Net Debt?
As you can see below, at the end of March 2020, Heidrick & Struggles International had US$100.0m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has US$251.0m in cash, leading to a US$151.0m net cash position.
A Look At Heidrick & Struggles International's Liabilities
Zooming in on the latest balance sheet data, we can see that Heidrick & Struggles International had liabilities of US$207.9m due within 12 months and liabilities of US$272.8m due beyond that. Offsetting this, it had US$251.0m in cash and US$162.0m in receivables that were due within 12 months. So it has liabilities totalling US$67.8m more than its cash and near-term receivables, combined.
Since publicly traded Heidrick & Struggles International shares are worth a total of US$404.4m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Heidrick & Struggles International also has more cash than debt, so we're pretty confident it can manage its debt safely.
But the other side of the story is that Heidrick & Struggles International saw its EBIT decline by 4.5% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Heidrick & Struggles International can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Heidrick & Struggles International may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Heidrick & Struggles International recorded free cash flow worth a fulsome 91% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
Summing up
Although Heidrick & Struggles International's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$151.0m. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in US$64m. So we don't think Heidrick & Struggles International's use of debt is risky. We'd be motivated to research the stock further if we found out that Heidrick & Struggles International 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.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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