Is International Business Settlement Holdings (HKG:147) Weighed On By Its Debt Load?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for International Business Settlement Holdings

What Is International Business Settlement Holdings's Debt?

As you can see below, International Business Settlement Holdings had HK$863.8m of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has HK$288.6m in cash leading to net debt of about HK$575.2m.

How Healthy Is International Business Settlement Holdings' Balance Sheet?

According to the last reported balance sheet, International Business Settlement Holdings had liabilities of HK$2.01b due within 12 months, and liabilities of HK$230.9m due beyond 12 months. On the other hand, it had cash of HK$288.6m and HK$43.0m worth of receivables due within a year. So it has liabilities totalling HK$1.91b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of HK$1.32b, we think shareholders really should watch International Business Settlement Holdings's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year International Business Settlement Holdings had a loss before interest and tax, and actually shrunk its revenue by 61%, to HK$132m. That makes us nervous, to say the least.

Caveat Emptor

Not only did International Business Settlement Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost HK$121m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of HK$327m over the last twelve months. So suffice it to say we 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. To that end, you should learn about the 3 warning signs we've spotted with International Business Settlement Holdings (including 2 which are significant) .

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.