Does ISP Global (HKG:8487) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, ISP Global Limited (HKG:8487) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for ISP Global

How Much Debt Does ISP Global Carry?

As you can see below, ISP Global had CN¥43.9m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥49.9m in cash to offset that, meaning it has CN¥6.02m net cash.

How Strong Is ISP Global's Balance Sheet?

The latest balance sheet data shows that ISP Global had liabilities of CN¥72.4m due within a year, and liabilities of CN¥24.4m falling due after that. Offsetting these obligations, it had cash of CN¥49.9m as well as receivables valued at CN¥30.4m due within 12 months. So it has liabilities totalling CN¥16.4m more than its cash and near-term receivables, combined.

Since publicly traded ISP Global shares are worth a total of CN¥206.3m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, ISP Global 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 it is ISP Global's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, ISP Global reported revenue of CN¥229m, which is a gain of 76%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is ISP Global?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months ISP Global lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥23m of cash and made a loss of CN¥21m. But at least it has CN¥6.02m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, ISP Global may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for ISP Global (of which 1 is potentially serious!) you should know about.

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.