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

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that InvesTech Holdings Limited (HKG:1087) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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

How Much Debt Does InvesTech Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 InvesTech Holdings had CN¥61.6m 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¥17.3m net cash.

How Strong Is InvesTech Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that InvesTech Holdings had liabilities of CN¥278.3m due within 12 months and liabilities of CN¥43.6m due beyond that. Offsetting these obligations, it had cash of CN¥78.9m as well as receivables valued at CN¥208.2m due within 12 months. So its liabilities total CN¥34.9m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because InvesTech Holdings is worth CN¥104.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, InvesTech Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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 9.9%. That's not what we would hope to see.

So How Risky Is InvesTech Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months InvesTech Holdings lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥15m and booked a CN¥23m accounting loss. Given it only has net cash of CN¥17.3m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. We've identified 3 warning signs with InvesTech Holdings (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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.