Is InvesTech Holdings (HKG:1087) A Risky Investment?

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.' 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 InvesTech Holdings Limited (HKG:1087) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out the opportunities and risks within the HK Communications industry.

What Is InvesTech Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 InvesTech Holdings had CN¥54.6m of debt, an increase on CN¥38.1m, over one year. However, its balance sheet shows it holds CN¥78.9m in cash, so it actually has CN¥24.3m net cash.

A Look At InvesTech Holdings' Liabilities

The latest balance sheet data shows that InvesTech Holdings had liabilities of CN¥278.3m due within a year, and liabilities of CN¥43.6m falling due after that. On the other hand, it had cash of CN¥78.9m and CN¥208.2m worth of receivables due within a year. So it has liabilities totalling CN¥34.9m more than its cash and near-term receivables, combined.

This deficit isn't so bad because InvesTech Holdings is worth CN¥84.9m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, InvesTech Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since InvesTech 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.

Over 12 months, InvesTech Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥451m, which is a fall of 9.7%. That's not what we would hope to see.

So How Risky Is InvesTech Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year InvesTech Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥16m of cash and made a loss of CN¥23m. With only CN¥24.3m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for InvesTech Holdings you should be aware of, and 1 of them is significant.

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.