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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Intrepid Potash, Inc. (NYSE:IPI) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company 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 and debt together.

What Is Intrepid Potash's Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Intrepid Potash had debt of US$4.00m, up from none in one year. But on the other hand it also has US$7.04m in cash, leading to a US$3.04m net cash position.

How Healthy Is Intrepid Potash's Balance Sheet?

The latest balance sheet data shows that Intrepid Potash had liabilities of US$46.5m due within a year, and liabilities of US$37.6m falling due after that. Offsetting these obligations, it had cash of US$7.04m as well as receivables valued at US$23.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$53.6m.

This deficit isn't so bad because Intrepid Potash is worth US$234.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Intrepid Potash also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Intrepid Potash's load is not too heavy, because its EBIT was down 94% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Intrepid Potash 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. Intrepid Potash 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. Looking at the most recent three years, Intrepid Potash recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Intrepid Potash'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$3.04m. So we are not troubled with Intrepid Potash's debt use. While Intrepid Potash didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away. Click here to see if its earnings are heading in the right direction, over the medium term.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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