Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Intron Technology Holdings Limited (HKG:1760) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Intron Technology Holdings Carry?
As you can see below, at the end of December 2018, Intron Technology Holdings had CN¥374.2m of debt, up from CN¥172.0m a year ago. Click the image for more detail. But on the other hand it also has CN¥655.1m in cash, leading to a CN¥281.0m net cash position.
How Healthy Is Intron Technology Holdings's Balance Sheet?
We can see from the most recent balance sheet that Intron Technology Holdings had liabilities of CN¥827.5m falling due within a year, and liabilities of CN¥2.41m due beyond that. Offsetting this, it had CN¥655.1m in cash and CN¥725.9m in receivables that were due within 12 months. So it can boast CN¥551.1m more liquid assets than total liabilities.
This surplus suggests that Intron Technology Holdings is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Intron Technology Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Intron Technology Holdings grew its EBIT by 48% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Intron Technology Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Intron Technology Holdings 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. During the last three years, Intron Technology Holdings burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
While we empathize with investors who find debt concerning, you should keep in mind that Intron Technology Holdings has net cash of CN¥281m, as well as more liquid assets than liabilities. And we liked the look of last year's 48% year-on-year EBIT growth. So we don't have any problem with Intron Technology Holdings's use of debt. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Intron Technology Holdings insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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