These 4 Measures Indicate That i-Control Holdings (HKG:1402) Is Using Debt Reasonably Well

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that i-Control Holdings Limited (HKG:1402) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for i-Control Holdings

How Much Debt Does i-Control Holdings Carry?

The image below, which you can click on for greater detail, shows that i-Control Holdings had debt of HK$28.6m at the end of September 2020, a reduction from HK$33.0m over a year. But on the other hand it also has HK$56.3m in cash, leading to a HK$27.7m net cash position.

How Strong Is i-Control Holdings' Balance Sheet?

The latest balance sheet data shows that i-Control Holdings had liabilities of HK$53.5m due within a year, and liabilities of HK$860.0k falling due after that. On the other hand, it had cash of HK$56.3m and HK$42.0m worth of receivables due within a year. So it can boast HK$44.0m more liquid assets than total liabilities.

This short term liquidity is a sign that i-Control Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that i-Control Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact i-Control Holdings's saving grace is its low debt levels, because its EBIT has tanked 54% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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. Over the most recent three years, i-Control Holdings recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

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$27.7m, as well as more liquid assets than liabilities. The cherry on top was that in converted 77% of that EBIT to free cash flow, bringing in HK$11m. So we don't have any problem with i-Control Holdings's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that i-Control Holdings is showing 4 warning signs in our investment analysis , and 1 of those is concerning...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. 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.
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