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

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Indigo Star Holdings Limited (HKG:8373) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Indigo Star Holdings

What Is Indigo Star Holdings's Debt?

The image below, which you can click on for greater detail, shows that Indigo Star Holdings had debt of S$2.49m at the end of June 2023, a reduction from S$3.60m over a year. But on the other hand it also has S$7.80m in cash, leading to a S$5.31m net cash position.

A Look At Indigo Star Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Indigo Star Holdings had liabilities of S$13.4m due within 12 months and liabilities of S$943.0k due beyond that. Offsetting this, it had S$7.80m in cash and S$8.58m in receivables that were due within 12 months. So it actually has S$2.06m 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. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Indigo Star Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Indigo Star Holdings made a loss at the EBIT level, last year, it was also good to see that it generated S$1.2m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Indigo Star Holdings will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Indigo Star 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. Happily for any shareholders, Indigo Star Holdings actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Indigo Star Holdings has S$5.31m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of S$4.4m, being 372% of its EBIT. So we don't think Indigo Star Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Indigo Star Holdings (2 can't be ignored!) that you should be aware of before investing here.

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.