Stock Analysis

Is Indigo Star Holdings (HKG:8373) Using Debt Sensibly?

SEHK:8373
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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 can see that Indigo Star Holdings Limited (HKG:8373) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Indigo Star Holdings

What Is Indigo Star Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Indigo Star Holdings had S$2.09m of debt, an increase on none, over one year. However, it does have S$6.92m in cash offsetting this, leading to net cash of S$4.83m.

debt-equity-history-analysis
SEHK:8373 Debt to Equity History April 7th 2021

How Strong Is Indigo Star Holdings' Balance Sheet?

We can see from the most recent balance sheet that Indigo Star Holdings had liabilities of S$9.40m falling due within a year, and liabilities of S$1.11m due beyond that. Offsetting these obligations, it had cash of S$6.92m as well as receivables valued at S$10.2m due within 12 months. So it actually has S$6.60m more liquid assets than total liabilities.

This surplus suggests that Indigo Star Holdings is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face 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! 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Indigo Star Holdings had a loss before interest and tax, and actually shrunk its revenue by 54%, to S$9.4m. That makes us nervous, to say the least.

So How Risky Is Indigo Star Holdings?

Although Indigo Star Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of S$1.6m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. For example, we've discovered 2 warning signs for Indigo Star Holdings (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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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