Is Insight (SPSE:2172) Using Debt Sensibly?

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 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. We note that Insight Inc. (SPSE:2172) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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, 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Insight

What Is Insight's Debt?

As you can see below, Insight had JP¥301.0m of debt at December 2020, down from JP¥344.0m a year prior. But on the other hand it also has JP¥519.0m in cash, leading to a JP¥218.0m net cash position.

How Healthy Is Insight's Balance Sheet?

According to the last reported balance sheet, Insight had liabilities of JP¥333.0m due within 12 months, and liabilities of JP¥245.0m due beyond 12 months. Offsetting these obligations, it had cash of JP¥519.0m as well as receivables valued at JP¥194.0m due within 12 months. So it can boast JP¥135.0m more liquid assets than total liabilities.

It's good to see that Insight has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Insight has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Insight 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, Insight made a loss at the EBIT level, and saw its revenue drop to JP¥2.1b, which is a fall of 13%. That's not what we would hope to see.

So How Risky Is Insight?

Although Insight had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of JP¥199m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Insight (including 1 which is significant) .

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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