Health Check: How Prudently Does Intergis (KRX:129260) Use Debt?

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.' 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. We can see that Intergis Co., Ltd. (KRX:129260) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Intergis

How Much Debt Does Intergis Carry?

The image below, which you can click on for greater detail, shows that Intergis had debt of ₩135.5b at the end of September 2020, a reduction from ₩161.5b over a year. On the flip side, it has ₩18.7b in cash leading to net debt of about ₩116.8b.

A Look At Intergis's Liabilities

Zooming in on the latest balance sheet data, we can see that Intergis had liabilities of ₩137.6b due within 12 months and liabilities of ₩98.8b due beyond that. Offsetting these obligations, it had cash of ₩18.7b as well as receivables valued at ₩122.7b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩95.0b.

Given this deficit is actually higher than the company's market capitalization of ₩87.7b, we think shareholders really should watch Intergis's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is Intergis'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.

In the last year Intergis had a loss before interest and tax, and actually shrunk its revenue by 7.3%, to ₩454b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Intergis produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping ₩15b. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of ₩27b. In the meantime, we consider the stock to be risky. 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. Case in point: We've spotted 3 warning signs for Intergis you should be aware of, and 1 of them is potentially serious.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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