Is IPE Group (HKG:929) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 IPE Group Limited (HKG:929) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for IPE Group

What Is IPE Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that IPE Group had HK$175.6m of debt in June 2023, down from HK$220.0m, one year before. However, it does have HK$722.6m in cash offsetting this, leading to net cash of HK$546.9m.

A Look At IPE Group's Liabilities

Zooming in on the latest balance sheet data, we can see that IPE Group had liabilities of HK$176.1m due within 12 months and liabilities of HK$154.1m due beyond that. On the other hand, it had cash of HK$722.6m and HK$260.2m worth of receivables due within a year. So it can boast HK$652.6m more liquid assets than total liabilities.

This surplus strongly suggests that IPE Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, IPE Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since IPE Group 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 IPE Group had a loss before interest and tax, and actually shrunk its revenue by 13%, to HK$879m. That's not what we would hope to see.

So How Risky Is IPE Group?

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 IPE Group 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$60m and booked a HK$4.0m accounting loss. With only HK$546.9m on the balance sheet, it would appear that its going to need to raise capital again 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with IPE Group (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.