Is International Development (HKG:372) A Risky Investment?

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.' 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. We note that PT International Development Corporation Limited (HKG:372) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for International Development

What Is International Development's Debt?

The image below, which you can click on for greater detail, shows that at September 2021 International Development had debt of HK$72.7m, up from none in one year. But it also has HK$175.5m in cash to offset that, meaning it has HK$102.8m net cash.

How Strong Is International Development's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that International Development had liabilities of HK$74.7m due within 12 months and liabilities of HK$41.8m due beyond that. Offsetting this, it had HK$175.5m in cash and HK$10.1m in receivables that were due within 12 months. So it can boast HK$69.1m more liquid assets than total liabilities.

This short term liquidity is a sign that International Development could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that International Development has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is International Development's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year International Development had a loss before interest and tax, and actually shrunk its revenue by 8.4%, to HK$1.3b. We would much prefer see growth.

So How Risky Is International Development?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year International Development had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of HK$31m and booked a HK$82m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of HK$102.8m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 be aware of the 2 warning signs we've spotted with International Development .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.