i-Control Holdings (HKG:1402) Has A Pretty Healthy Balance Sheet

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. As with many other companies i-Control Holdings Limited (HKG:1402) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 i-Control Holdings

How Much Debt Does i-Control Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that i-Control Holdings had HK$20.5m of debt in September 2022, down from HK$24.5m, one year before. But on the other hand it also has HK$53.1m in cash, leading to a HK$32.6m net cash position.

How Strong Is i-Control Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that i-Control Holdings had liabilities of HK$64.1m due within 12 months and liabilities of HK$1.07m due beyond that. On the other hand, it had cash of HK$53.1m and HK$56.4m worth of receivables due within a year. So it can boast HK$44.3m more liquid assets than total liabilities.

This surplus suggests that i-Control Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, i-Control Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that i-Control Holdings has increased its EBIT by 5.3% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since i-Control Holdings will need earnings to service that debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While i-Control Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, i-Control Holdings recorded free cash flow of 40% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that i-Control Holdings has net cash of HK$32.6m, as well as more liquid assets than liabilities. And it also grew its EBIT by 5.3% over the last year. So we don't think i-Control Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that i-Control Holdings is showing 2 warning signs in our investment analysis , and 1 of those is 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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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.