Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Like many other companies ISP Global Limited (HKG:8487) uses debt. But should shareholders worry about its use of debt?
Why is debt risky?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.
Check out our latest analysis for ISP Global
What is ISP Global’s debt?
As you can see below, at the end of December 2021, ISP Global had a debt of S$3.72 million, compared to S$1.32 million a year ago. Click on the image for more details. However, his balance sheet shows that he holds S$12.1 million in cash, so he actually has net cash of S$8.38 million.
How strong is ISP Global’s balance sheet?
The latest balance sheet data shows that ISP Global had liabilities of S$6.35 million due within one year, and liabilities of S$2.32 million falling due thereafter. On the other hand, it had cash of S$12.1 million and S$7.90 million of receivables due within one year. It can therefore boast of having S$11.3 million more in cash than total Passives.
This luscious liquidity means that ISP Global’s balance sheet is as strong as a giant redwood. From this perspective, lenders should feel as secure as the beloved of a black belt karate master. Simply put, the fact that ISP Global has more cash than debt is arguably a good indication that it can safely manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is ISP Global’s earnings that will influence the balance sheet going forward. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.
On a 12-month basis, ISP Global reported revenue of S$19 million, a 102% gain, although it reported no earnings before interest and tax. There is therefore no doubt that shareholders encourage growth
So how risky is ISP Global?
We have no doubt that loss-making companies are, in general, more risky than profitable companies. And the fact is that over the past twelve months, ISP Global has been losing money in earnings before interest and taxes (EBIT). Indeed, during this period, he burned S$8.3 million and suffered a loss of S$1.8 million. With just S$8.38 million on the balance sheet, it looks like he will soon have to raise capital again. It is important to note that ISP Global’s revenue growth is imminent. While unprofitable businesses can be risky, they can also grow strongly and quickly in those pre-profit years. 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 outside of the balance sheet. We have identified 3 warning signs with ISP Global (at least 1 which is a bit unpleasant), and understanding them should be part of your investment process.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.