Here's Why Infinity Logistics and Transport Ventures (HKG:1442) Can Manage Its Debt Responsibly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Infinity Logistics and Transport Ventures Limited (HKG:1442) does use debt in its business. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Infinity Logistics and Transport Ventures

How Much Debt Does Infinity Logistics and Transport Ventures Carry?

The image below, which you can click on for greater detail, shows that Infinity Logistics and Transport Ventures had debt of RM59.2m at the end of December 2020, a reduction from RM69.3m over a year. But it also has RM72.1m in cash to offset that, meaning it has RM12.9m net cash.

A Look At Infinity Logistics and Transport Ventures' Liabilities

The latest balance sheet data shows that Infinity Logistics and Transport Ventures had liabilities of RM52.6m due within a year, and liabilities of RM70.4m falling due after that. On the other hand, it had cash of RM72.1m and RM47.2m worth of receivables due within a year. So its liabilities total RM3.68m more than the combination of its cash and short-term receivables.

Having regard to Infinity Logistics and Transport Ventures' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the RM845.7m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Infinity Logistics and Transport Ventures boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Infinity Logistics and Transport Ventures saw its EBIT drop by 2.7% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Infinity Logistics and Transport Ventures 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Infinity Logistics and Transport Ventures may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Infinity Logistics and Transport Ventures's free cash flow amounted to 21% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

We could understand if investors are concerned about Infinity Logistics and Transport Ventures's liabilities, but we can be reassured by the fact it has has net cash of RM12.9m. So we don't have any problem with Infinity Logistics and Transport Ventures's use of debt. 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. Be aware that Infinity Logistics and Transport Ventures is showing 1 warning sign in our investment analysis , 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. 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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