Here's Why International Business Settlement Holdings (HKG:147) Can Afford Some Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, International Business Settlement Holdings Limited (HKG:147) does carry debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for International Business Settlement Holdings

How Much Debt Does International Business Settlement Holdings Carry?

As you can see below, at the end of March 2022, International Business Settlement Holdings had HK$929.5m of debt, up from HK$875.9m a year ago. Click the image for more detail. On the flip side, it has HK$522.5m in cash leading to net debt of about HK$407.0m.

How Healthy Is International Business Settlement Holdings' Balance Sheet?

The latest balance sheet data shows that International Business Settlement Holdings had liabilities of HK$2.25b due within a year, and liabilities of HK$187.9m falling due after that. Offsetting these obligations, it had cash of HK$522.5m as well as receivables valued at HK$9.81m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$1.91b.

This deficit is considerable relative to its market capitalization of HK$2.42b, so it does suggest shareholders should keep an eye on International Business Settlement Holdings' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is International Business Settlement Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, International Business Settlement Holdings reported revenue of HK$304m, which is a gain of 256%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Even though International Business Settlement Holdings managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost HK$103m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through HK$132m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for International Business Settlement Holdings that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.