These 4 Measures Indicate That IPE Group (HKG:929) Is Using Debt Safely

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.' 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. Importantly, IPE Group Limited (HKG:929) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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. 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 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$204.6m of debt in December 2020, down from HK$258.5m, one year before. However, its balance sheet shows it holds HK$942.3m in cash, so it actually has HK$737.6m net cash.

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$227.6m due within 12 months and liabilities of HK$171.1m due beyond that. On the other hand, it had cash of HK$942.3m and HK$284.9m worth of receivables due within a year. So it can boast HK$828.5m more liquid assets than total liabilities.

This surplus liquidity suggests that IPE Group's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. 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!

In fact IPE Group's saving grace is its low debt levels, because its EBIT has tanked 59% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case IPE Group has HK$737.6m in net cash and a strong balance sheet. The cherry on top was that in converted 199% of that EBIT to free cash flow, bringing in HK$90m. So we don't think IPE Group'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. Case in point: We've spotted 4 warning signs for IPE Group you should be aware of, and 1 of them makes us a bit uncomfortable.

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. 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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