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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Intron Technology Holdings Limited (HKG:1760) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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. But on the other hand it also has CN¥689.8m in cash, leading to a CN¥220.7m net cash position.

How Strong Is Intron Technology Holdings' Balance Sheet?

According to the last reported balance sheet, Intron Technology Holdings had liabilities of CN¥792.7m due within 12 months, and liabilities of CN¥13.8m due beyond 12 months. On the other hand, it had cash of CN¥689.8m and CN¥796.7m worth of receivables due within a year. So it actually has CN¥680.0m more liquid assets than total liabilities.

This surplus suggests that Intron Technology Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Intron Technology Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Intron Technology Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Intron Technology Holdings burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is 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¥220.7m, 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Intron Technology Holdings .

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.