Is InvesTech Holdings (HKG:1087) Using Too Much Debt?

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 the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for InvesTech Holdings

What Is InvesTech Holdings's Debt?

The image below, which you can click on for greater detail, shows that at June 2020 InvesTech Holdings had debt of CN¥64.8m, up from CN¥42.1m in one year. However, its balance sheet shows it holds CN¥81.1m in cash, so it actually has CN¥16.2m net cash.

How Healthy Is InvesTech Holdings's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that InvesTech Holdings had liabilities of CN¥286.3m due within 12 months and liabilities of CN¥25.0m due beyond that. On the other hand, it had cash of CN¥81.1m and CN¥201.5m worth of receivables due within a year. So its liabilities total CN¥28.7m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because InvesTech Holdings is worth CN¥111.3m, 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! The balance sheet is clearly the area to focus on when you are analysing debt. But it is InvesTech 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.

Over 12 months, InvesTech Holdings reported revenue of CN¥468m, which is a gain of 8.8%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is InvesTech Holdings?

While InvesTech Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥13m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for InvesTech Holdings (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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. 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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