Is International Business Settlement Holdings (HKG:147) Using Debt Sensibly?
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, International Business Settlement Holdings Limited (HKG:147) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for International Business Settlement Holdings
What Is International Business Settlement Holdings's Net Debt?
The image below, which you can click on for greater detail, shows that International Business Settlement Holdings had debt of HK$668.0m at the end of March 2019, a reduction from HK$962.1m over a year. But on the other hand it also has HK$911.6m in cash, leading to a HK$243.6m net cash position.
How Healthy Is International Business Settlement Holdings's Balance Sheet?
We can see from the most recent balance sheet that International Business Settlement Holdings had liabilities of HK$2.18b falling due within a year, and liabilities of HK$36.0m due beyond that. Offsetting these obligations, it had cash of HK$911.6m as well as receivables valued at HK$89.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$1.21b.
This deficit isn't so bad because International Business Settlement Holdings is worth HK$3.33b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, International Business Settlement Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is International Business Settlement Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, International Business Settlement Holdings reported revenue of HK$828m, which is a gain of 52%. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is International Business Settlement Holdings?
While International Business Settlement Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$39m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. One positive is that International Business Settlement Holdings is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how International Business Settlement Holdings's profit, revenue, and operating cashflow have changed over the last few years.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
