Does MGP Ingredients (NASDAQ: MGPI) have a healthy track record?

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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We note that Ingredients MGP, Inc. (NASDAQ: MGPI) has debt on its balance sheet. But does this debt worry shareholders?

Why Does Debt Bring Risk?

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 painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

How much debt does MGP Ingredients have?

As you can see below, at the end of June 2021, MGP Ingredients was in debt of $ 270.4 million, up from $ 64.5 million a year ago. Click on the image for more details. However, because it has a cash reserve of US $ 37.2 million, its net debt is less, at approximately US $ 233.1 million.

NasdaqGS: MGPI History of debt to equity November 3, 2021

How healthy is MGP Ingredients’ track record?

The latest balance sheet data shows that MGP Ingredients had a liability of $ 83.4 million due within one year, and a liability of $ 337.4 million due after that. In return, he had $ 37.2 million in cash and $ 79.1 million in receivables due within 12 months. Its liabilities therefore total US $ 304.4 million more than the combination of its cash and short-term receivables.

This deficit is not that big as MGP Ingredients is worth US $ 1.45 billion, and could therefore probably raise enough capital to consolidate its balance sheet, should the need arise. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution.

In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

MGP Ingredients’ net debt to EBITDA ratio of approximately 2.3 suggests moderate use of debt. And its imposing EBIT of 39.7 times its interest costs, means the debt load is as light as a peacock feather. It is important to note that MGP Ingredients has increased its EBIT by 59% over the past twelve months, and this growth will make it easier to process its debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, 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 IRS may love accounting profits, lenders only accept hard cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, MGP Ingredients recorded free cash flow of 43% of its EBIT, which is lower 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 interest costs with EBIT delights us like a fluffy puppy does a toddler. And that’s just the start of good news as its EBIT growth rate is also very encouraging. When we consider the range of factors above, it looks like MGP Ingredients is pretty reasonable with its use of debt. While this carries some risk, it can also improve returns for shareholders. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. Example: we have spotted 3 warning signs for MGP ingredients you must be aware.

If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.

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 shares 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.

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