Does Indigo Star Holdings (HKG:8373) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Indigo Star Holdings Limited (HKG:8373) makes use of 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Indigo Star Holdings

What Is Indigo Star Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Indigo Star Holdings had debt of S$4.70m, up from S$2.34m in one year. But it also has S$8.61m in cash to offset that, meaning it has S$3.92m net cash.

How Healthy Is Indigo Star Holdings' Balance Sheet?

According to the last reported balance sheet, Indigo Star Holdings had liabilities of S$11.0m due within 12 months, and liabilities of S$1.14m due beyond 12 months. Offsetting this, it had S$8.61m in cash and S$6.90m in receivables that were due within 12 months. So it can boast S$3.37m more liquid assets than total liabilities.

It's good to see that Indigo Star Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Indigo Star Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Indigo Star Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Indigo Star Holdings had a loss before interest and tax, and actually shrunk its revenue by 36%, to S$12m. To be frank that doesn't bode well.

So How Risky Is Indigo Star Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Indigo Star Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through S$2.9m of cash and made a loss of S$2.2m. Given it only has net cash of S$3.92m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 2 warning signs we've spotted with Indigo Star Holdings (including 1 which is a bit unpleasant) .

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.

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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