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. We can see that Intraco Limited (SGX:I06) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
What Is Intraco's Debt?
As you can see below, at the end of June 2021, Intraco had S$15.8m of debt, up from S$15.0m a year ago. Click the image for more detail. But it also has S$43.6m in cash to offset that, meaning it has S$27.8m net cash.
How Healthy Is Intraco's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Intraco had liabilities of S$34.2m due within 12 months and liabilities of S$1.46m due beyond that. On the other hand, it had cash of S$43.6m and S$32.2m worth of receivables due within a year. So it can boast S$40.2m more liquid assets than total liabilities.
This surplus liquidity suggests that Intraco's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Intraco 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 Intraco will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Intraco wasn't profitable at an EBIT level, but managed to grow its revenue by 33%, to S$187m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Intraco?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Intraco lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through S$11m of cash and made a loss of S$9.6m. With only S$27.8m on the balance sheet, it would appear that its going to need to raise capital again soon. Intraco's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Intraco is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.