We think Ebix (NASDAQ:EBIX) is taking risks with its debt

David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies Ebix, Inc. (NASDAQ:EBIX) uses debt. But does this debt worry shareholders?

When is debt a problem?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, many companies use debt to finance their growth, without any negative consequences. When we look at debt levels, we first consider cash and debt levels, together.

Our analysis indicates that EBIX is potentially undervalued!

What is Ebix’s net debt?

As you can see below, Ebix had a debt of US$635.5 million in September 2022, compared to US$666.1 million the previous year. However, he also had $90.7 million in cash, so his net debt is $544.8 million.

A Look at Ebix’s Responsibilities

According to the last published balance sheet, Ebix had liabilities of $805.3 million maturing within 12 months and liabilities of $39.6 million maturing beyond 12 months. In return, it had $90.7 million in cash and $163.0 million in receivables due within 12 months. It therefore has liabilities totaling $591.2 million more than its cash and short-term receivables, combined.

This is a mountain of leverage compared to its market capitalization of US$619.6 million. If its lenders asked it to shore up its balance sheet, shareholders would likely face significant dilution.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.

Ebix has a debt/EBITDA ratio of 3.9 and its EBIT covered its interest charges 2.5 times. Taken together, this implies that, while we wouldn’t like to see debt levels increase, we think he can manage his current leverage. Notably, Ebix’s EBIT has been pretty flat over the past year, which isn’t ideal given the leverage. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Ebix can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, a business needs free cash flow to pay off its debts; book profits are not enough. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, Ebix’s free cash flow amounted to 46% of its EBIT, less than expected. This low cash conversion makes debt management more difficult.

Our point of view

To be frank, Ebix’s level of total liabilities and its history of covering its interest charges by its EBIT makes us rather uncomfortable with its level of leverage. But at least its EBIT growth rate isn’t that bad. Looking at the balance sheet and taking all of these factors into account, we think debt makes Ebix stock a bit risky. Some people like that kind of risk, but we’re aware of the potential pitfalls, so we’d probably prefer it to take on less debt. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Be aware that Ebix displays 2 warning signs in our investment analysis and 1 of them makes us a little uncomfortable…

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.