International Business Settlement Holdings (HKG:147) Is Making Moderate Use Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies International Business Settlement Holdings Limited (HKG:147) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 International Business Settlement Holdings had HK$887.1m of debt, an increase on HK$723.8m, over one year. However, it does have HK$584.2m in cash offsetting this, leading to net debt of about HK$302.9m.

How Strong Is International Business Settlement Holdings' Balance Sheet?

We can see from the most recent balance sheet that International Business Settlement Holdings had liabilities of HK$2.24b falling due within a year, and liabilities of HK$228.4m due beyond that. On the other hand, it had cash of HK$584.2m and HK$27.9m worth of receivables due within a year. So its liabilities total HK$1.86b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since International Business Settlement Holdings has a market capitalization of HK$4.88b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 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 International Business Settlement Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 175%, to HK$339m. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Despite the top line growth, International Business Settlement Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost HK$102m 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$91m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. For example International Business Settlement Holdings has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.