Is ISP Global (HKG:8487) Using Debt In A Risky Way?

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. Importantly, ISP Global Limited (HKG:8487) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for ISP Global

What Is ISP Global's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2022 ISP Global had debt of S$9.74m, up from S$1.74m in one year. But on the other hand it also has S$9.75m in cash, leading to a S$18.7k net cash position.

How Healthy Is ISP Global's Balance Sheet?

The latest balance sheet data shows that ISP Global had liabilities of S$26.2m due within a year, and liabilities of S$1.81m falling due after that. Offsetting these obligations, it had cash of S$9.75m as well as receivables valued at S$7.86m due within 12 months. So its liabilities total S$10.4m more than the combination of its cash and short-term receivables.

ISP Global has a market capitalization of S$30.9m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year ISP Global wasn't profitable at an EBIT level, but managed to grow its revenue by 78%, to S$33m. Shareholders probably have their fingers crossed that it can grow its way to profits.

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. And over the same period it saw negative free cash outflow of S$7.3m and booked a S$6.3m accounting loss. Given it only has net cash of S$18.7k, the company may need to raise more capital if it doesn't reach break-even soon. 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. We've identified 3 warning signs with ISP Global (at least 1 which is significant) , and understanding them should be part of your investment process.

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.