IPE Group (HKG:929) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 IPE Group Limited (HKG:929) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for IPE Group

What Is IPE Group's Net Debt?

The image below, which you can click on for greater detail, shows that IPE Group had debt of HK$177.6m at the end of June 2021, a reduction from HK$231.4m over a year. But on the other hand it also has HK$836.4m in cash, leading to a HK$658.8m net cash position.

How Healthy Is IPE Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that IPE Group had liabilities of HK$381.3m due within 12 months and liabilities of HK$32.4m due beyond that. Offsetting this, it had HK$836.4m in cash and HK$281.0m in receivables that were due within 12 months. So it actually has HK$703.8m more liquid assets than total liabilities.

This luscious liquidity implies that IPE Group's balance sheet is sturdy like a giant sequoia tree. 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 IPE Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that IPE Group grew its EBIT by 163% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is IPE Group'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While IPE Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, IPE Group actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that IPE Group has net cash of HK$658.8m, as well as more liquid assets than liabilities. The cherry on top was that in converted 241% of that EBIT to free cash flow, bringing in HK$19m. The bottom line is that IPE Group's use of debt is absolutely fine. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for IPE Group (1 is a bit unpleasant!) that you should be aware of before investing here.

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.
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