Is i.century Holding (HKG:8507) A Risky Investment?

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. As with many other companies i.century Holding Limited (HKG:8507) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for i.century Holding

What Is i.century Holding's Net Debt?

The chart below, which you can click on for greater detail, shows that i.century Holding had HK$18.6m in debt in September 2021; about the same as the year before. However, its balance sheet shows it holds HK$24.1m in cash, so it actually has HK$5.57m net cash.

How Strong Is i.century Holding's Balance Sheet?

According to the last reported balance sheet, i.century Holding had liabilities of HK$64.5m due within 12 months, and liabilities of HK$166.0k due beyond 12 months. On the other hand, it had cash of HK$24.1m and HK$32.2m worth of receivables due within a year. So it has liabilities totalling HK$8.30m more than its cash and near-term receivables, combined.

Since publicly traded i.century Holding shares are worth a total of HK$88.0m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, i.century Holding boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is i.century Holding'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.

In the last year i.century Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 94%, to HK$142m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is i.century Holding?

Although i.century Holding had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of HK$4.7m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The good news for i.century Holding shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for i.century Holding (of which 1 is significant!) you should know about.

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.