Is ISP Global (HKG:8487) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, ISP Global Limited (HKG:8487) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for ISP Global

How Much Debt Does ISP Global Carry?

The image below, which you can click on for greater detail, shows that at June 2022 ISP Global had debt of S$6.82m, up from S$6.04m in one year. However, its balance sheet shows it holds S$9.03m in cash, so it actually has S$2.21m net cash.

A Look At ISP Global's Liabilities

The latest balance sheet data shows that ISP Global had liabilities of S$13.3m due within a year, and liabilities of S$2.24m falling due after that. On the other hand, it had cash of S$9.03m and S$8.78m worth of receivables due within a year. So it actually has S$2.25m more liquid assets than total liabilities.

This surplus suggests that ISP Global has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that ISP Global has more cash than debt is arguably a good indication that it can manage its debt safely. 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 ISP Global 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, ISP Global reported revenue of S$20m, which is a gain of 99%, 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 S$10m of cash and made a loss of S$4.6m. Given it only has net cash of S$2.21m, the company may need to raise more capital if it doesn't reach break-even soon. ISP Global's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that ISP Global is showing 3 warning signs in our investment analysis , and 2 of those are a bit concerning...

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. 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.