Here's Why IncentiaPay (ASX:INP) Can Afford Some Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 IncentiaPay Limited (ASX:INP) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

See our latest analysis for IncentiaPay

How Much Debt Does IncentiaPay Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 IncentiaPay had AU$4.61m of debt, an increase on AU$3.21m, over one year. However, it also had AU$4.08m in cash, and so its net debt is AU$524.0k.

How Healthy Is IncentiaPay's Balance Sheet?

According to the last reported balance sheet, IncentiaPay had liabilities of AU$17.2m due within 12 months, and liabilities of AU$1.32m due beyond 12 months. Offsetting these obligations, it had cash of AU$4.08m as well as receivables valued at AU$1.00m due within 12 months. So its liabilities total AU$13.4m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because IncentiaPay is worth AU$26.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since IncentiaPay 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, IncentiaPay made a loss at the EBIT level, and saw its revenue drop to AU$19m, which is a fall of 54%. That makes us nervous, to say the least.

Caveat Emptor

Not only did IncentiaPay's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping AU$7.8m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through AU$8.2m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that IncentiaPay is showing 5 warning signs in our investment analysis , and 2 of those are potentially serious...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.
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