Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk.’ 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 International Business Settlement Holdings Limited (HKG:147) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.
See 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 at March 2021 International Business Settlement Holdings had debt of HK$875.9m, up from HK$699.2m in one year. However, it also had HK$632.7m in cash, and so its net debt is HK$243.2m.
How Strong Is International Business Settlement Holdings’ Balance Sheet?
We can see from the most recent balance sheet that International Business Settlement Holdings had liabilities of HK$2.36b falling due within a year, and liabilities of HK$159.3m due beyond that. On the other hand, it had cash of HK$632.7m and HK$25.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$1.86b.
Given this deficit is actually higher than the company’s market capitalization of HK$1.75b, we think shareholders really should watch International Business Settlement Holdings’s debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But you can’t view debt in total isolation; since International Business Settlement Holdings will need earnings to service that debt. 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 made a loss at the EBIT level, and saw its revenue drop to HK$86m, which is a fall of 78%. To be frank that doesn’t bode well.
Not only did International Business Settlement Holdings’s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost HK$141m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It’s fair to say the loss of HK$132m didn’t encourage us either; we’d like to see a profit. And until that time we think this is a risky stock. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we’ve identified 2 warning signs for International Business Settlement Holdings (1 is significant) you should be aware of.
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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