Is Ignite (ASX:IGN) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Ignite Limited (ASX:IGN) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Ignite

What Is Ignite's Debt?

As you can see below, at the end of December 2022, Ignite had AU$2.53m of debt, up from AU$708.0k a year ago. Click the image for more detail. On the flip side, it has AU$175.0k in cash leading to net debt of about AU$2.35m.

A Look At Ignite's Liabilities

According to the last reported balance sheet, Ignite had liabilities of AU$6.87m due within 12 months, and liabilities of AU$546.0k due beyond 12 months. Offsetting this, it had AU$175.0k in cash and AU$10.7m in receivables that were due within 12 months. So it actually has AU$3.45m more liquid assets than total liabilities.

This surplus strongly suggests that Ignite has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Ignite will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Ignite made a loss at the EBIT level, and saw its revenue drop to AU$112m, which is a fall of 4.1%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Ignite produced an earnings before interest and tax (EBIT) loss. Indeed, it lost AU$311k at the EBIT level. Having said that, the balance sheet has plenty of liquid assets for now. That will give the company some time and space to grow and develop its business as need be. The company is risky because it will grow into the future to get to profitability and free cash flow. 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. To that end, you should be aware of the 2 warning signs we've spotted with Ignite .

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.