Is Intron Technology Holdings (HKG:1760) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that Intron Technology Holdings Limited (HKG:1760) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Intron Technology Holdings

What Is Intron Technology Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Intron Technology Holdings had CN¥469.1m of debt, an increase on CN¥415.9m, over one year. However, it does have CN¥676.3m in cash offsetting this, leading to net cash of CN¥207.2m.

How Strong Is Intron Technology Holdings' Balance Sheet?

We can see from the most recent balance sheet that Intron Technology Holdings had liabilities of CN¥792.7m falling due within a year, and liabilities of CN¥13.8m due beyond that. On the other hand, it had cash of CN¥676.3m and CN¥791.3m worth of receivables due within a year. So it actually has CN¥661.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Intron Technology Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Intron Technology Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Intron Technology Holdings's EBIT fell a jaw-dropping 32% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Intron Technology Holdings 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Intron Technology Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Intron Technology Holdings saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Intron Technology Holdings has net cash of CN¥207.2m, as well as more liquid assets than liabilities. So while Intron Technology Holdings does not have a great balance sheet, it's certainly not too bad. 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. Be aware that Intron Technology Holdings is showing 2 warning signs in our investment analysis , you should know about...

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.
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