Some say volatility, rather than debt, is the best way to view risk as an investor, but Warren Buffett said “volatility is far from risk.” It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that International Business Settlement Holdings Limited (HKG: 147) uses debt in his business. But should shareholders be concerned about its use of debt?
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, many companies use debt to finance their growth without negative consequences. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest analysis for International Business Settlement Holdings
What is the net debt of International Business Settlement Holdings?
The image below, which you can click for more details, shows that in March 2021, International Business Settlement Holdings had a debt of HK $ 875.9 million, compared to HK $ 699.2 million in one. year. However, he also had HK $ 632.7 million in cash, so his net debt is HK $ 243.2 million.
How strong is International Business Settlement Holdings’ balance sheet?
We can see from the most recent balance sheet that International Business Settlement Holdings had a liability of HK $ 2.36 billion maturing within one year, and a liability of HK $ 159.3 million as of of the. On the other hand, he had HK $ 632.7 million in cash and $ 25.8 million in receivables due within one year. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by HK $ 1.86 billion.
Given that this deficit is actually greater than the company’s market cap of HK $ 1.75 billion, we believe shareholders should really watch the debt levels of International Business Settlement Holdings, like a parent who watches her child ride a bicycle for the first time. Hypothetically, an extremely large dilution would be necessary if the company was forced to repay its debts by raising capital at the current share price. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; since International Business Settlement Holdings will need revenue to repay this debt. So, if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.
Year over 12 months, International Business Settlement Holdings recorded a loss in EBIT and saw revenue drop to HK $ 86 million, a decrease of 78%. To be frank, that doesn’t bode well.
Not only has International Business Settlement Holdings’ revenue declined over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). Indeed, he lost HK $ 141 million in EBIT. Considering that aside from the liabilities mentioned above, we are nervous about the business. It would have to improve its operation quickly for us to take an interest in it. It is fair to say that the loss of HK $ 132 million did not encourage us either; we would like to see a profit. And until then, we believe it is a risky move. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we have identified 2 warning signs for International Business Settlement Holdings (1 is significant) you must be aware.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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