These 4 Measures Indicate That In Construction Holdings (HKG:1500) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, In Construction Holdings Limited (HKG:1500) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

Check out our latest analysis for In Construction Holdings

How Much Debt Does In Construction Holdings Carry?

The chart below, which you can click on for greater detail, shows that In Construction Holdings had HK$13.0m in debt in September 2021; about the same as the year before. However, it does have HK$143.7m in cash offsetting this, leading to net cash of HK$130.7m.

How Healthy Is In Construction Holdings' Balance Sheet?

According to the last reported balance sheet, In Construction Holdings had liabilities of HK$184.6m due within 12 months, and liabilities of HK$7.85m due beyond 12 months. On the other hand, it had cash of HK$143.7m and HK$393.1m worth of receivables due within a year. So it can boast HK$344.3m more liquid assets than total liabilities.

This surplus strongly suggests that In Construction Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that In Construction Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, In Construction Holdings grew its EBIT by 307% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is In Construction Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. In Construction 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, In Construction Holdings reported free cash flow worth 14% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While we empathize with investors who find debt concerning, the bottom line is that In Construction Holdings has net cash of HK$130.7m and plenty of liquid assets. And it impressed us with its EBIT growth of 307% over the last year. So is In Construction Holdings's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with In Construction Holdings (including 1 which is a bit concerning) .

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.