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 i.century Holding Limited (HKG:8507) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is i.century Holding’s Debt?
The image below, which you can click on for greater detail, shows that at March 2019 i.century Holding had debt of HK$12.7m, up from HK$8.70m in one year. But it also has HK$39.5m in cash to offset that, meaning it has HK$26.8m net cash.
How Strong Is i.century Holding’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that i.century Holding had liabilities of HK$33.0m due within 12 months and liabilities of HK$358.0k due beyond that. On the other hand, it had cash of HK$39.5m and HK$17.1m worth of receivables due within a year. So it actually has HK$23.2m more liquid assets than total liabilities.
This surplus liquidity suggests that i.century Holding’s balance sheet could take a hit just as well as Homer Simpson’s head can take a punch. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, i.century Holding boasts net cash, so it’s fair to say it does not have a heavy debt load! There’s no doubt that we learn most about debt from the balance sheet. But it is i.century Holding’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, i.century Holding saw its revenue drop to HK$118m, which is a fall of 4.0%. We would much prefer see growth.
So How Risky Is i.century Holding?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months i.century Holding lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$21m of cash and made a loss of HK$15m. But at least it has HK$39m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn’t seem overly risky, at the moment, but we’re always cautious until we see the positive free cash flow. For riskier companies like i.century Holding I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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.
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