Is Isentia Group (ASX:ISD) A Risky Investment?

By
Simply Wall St
Published
June 04, 2021
Source: Shutterstock

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Isentia Group Limited (ASX:ISD) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Isentia Group

What Is Isentia Group's Net Debt?

The image below, which you can click on for greater detail, shows that Isentia Group had debt of AU$39.9m at the end of December 2020, a reduction from AU$42.2m over a year. However, it does have AU$9.67m in cash offsetting this, leading to net debt of about AU$30.2m.

debt-equity-history-analysis
ASX:ISD Debt to Equity History June 4th 2021

How Healthy Is Isentia Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Isentia Group had liabilities of AU$28.7m due within 12 months and liabilities of AU$48.6m due beyond that. On the other hand, it had cash of AU$9.67m and AU$14.0m worth of receivables due within a year. So its liabilities total AU$53.6m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the AU$14.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Isentia Group would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Isentia Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Isentia Group had a loss before interest and tax, and actually shrunk its revenue by 17%, to AU$97m. We would much prefer see growth.

Caveat Emptor

While Isentia Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost AU$560k at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost AU$17m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's 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. For example, we've discovered 3 warning signs for Isentia Group that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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