These 4 Measures Indicate That IntelliCentrics Global Holdings (HKG:6819) Is Using Debt Reasonably Well

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.' 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. As with many other companies IntelliCentrics Global Holdings Ltd. (HKG:6819) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 IntelliCentrics Global Holdings

What Is IntelliCentrics Global Holdings's Debt?

As you can see below, IntelliCentrics Global Holdings had US$21.5m of debt at June 2020, down from US$31.5m a year prior. But on the other hand it also has US$55.7m in cash, leading to a US$34.2m net cash position.

A Look At IntelliCentrics Global Holdings's Liabilities

We can see from the most recent balance sheet that IntelliCentrics Global Holdings had liabilities of US$47.2m falling due within a year, and liabilities of US$4.48m due beyond that. On the other hand, it had cash of US$55.7m and US$743.0k worth of receivables due within a year. So it actually has US$4.83m more liquid assets than total liabilities.

Having regard to IntelliCentrics Global Holdings's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$376.2m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that IntelliCentrics Global Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, IntelliCentrics Global Holdings grew its EBIT by 115% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is IntelliCentrics Global Holdings'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. IntelliCentrics Global Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, IntelliCentrics Global Holdings reported free cash flow worth 14% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case IntelliCentrics Global Holdings has US$34.2m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 115% over the last year. So is IntelliCentrics Global Holdings's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 4 warning signs for IntelliCentrics Global Holdings you should be aware of, and 2 of them are concerning.

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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