MGP Ingredients (NASDAQ:MGPI) seems to be using debt quite wisely

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. Above all, MGP Ingredients, Inc. (NASDAQ:MGPI) is in debt. But the real question is whether this debt makes the business risky.

What risk does debt carry?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. 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, debt can be an important tool in businesses, especially capital-intensive businesses. When we think about a company’s use of debt, we first look at cash and debt together.

Our analysis indicates that The MGPI is potentially undervalued!

What is MGP Ingredients debt?

As you can see below, MGP Ingredients had a debt of US$232.0 million in June 2022, compared to US$270.4 million the previous year. However, since he has a cash reserve of $37.4 million, his net debt is less, at around $194.5 million.

NasdaqGS: MGPI Debt to Equity October 11, 2022

How healthy is MGP Ingredients’ balance sheet?

We can see from the most recent balance sheet that MGP Ingredients had liabilities of US$93.3 million falling due within one year, and liabilities of US$310.3 million due beyond. On the other hand, it had $37.4 million in cash and $105.4 million in receivables due within a year. Thus, its liabilities total $260.7 million more than the combination of its cash and short-term receivables.

Given that MGP Ingredients has a market capitalization of US$2.31 billion, it’s hard to believe that these liabilities pose a big threat. However, we think it’s worth keeping an eye on the strength of its balance sheet, as it can change over time.

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). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).

MGP Ingredients’ net debt represents only 1.3 times its EBITDA. And its EBIT easily covers its interest costs, which is 22.2 times the size. One could therefore say that he is no more threatened by his debt than an elephant is by a mouse. In addition, MGP Ingredients has increased its EBIT by 46% over the last twelve months, and this growth will facilitate the management of its debt. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine MGP Ingredients’ ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, while the taxman may love accounting profits, lenders only accept 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 40% of its EBIT, less than expected. This low cash conversion makes debt management more difficult.

Our point of view

The good news is that MGP Ingredients’ demonstrated ability to cover its interest costs with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, since its EBIT growth rate also confirms this impression! Overall, we think MGP Ingredients’ use of debt seems entirely reasonable and we’re not worried about that. After all, reasonable leverage can increase return on equity. 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. For example, we have identified 1 warning sign for MGP ingredients of which you should be aware.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.

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.

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