Is Intraco (SGX:I06) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Intraco Limited (SGX:I06) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

See our latest analysis for Intraco

What Is Intraco's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Intraco had S$9.59m of debt in December 2022, down from S$12.2m, one year before. But it also has S$38.0m in cash to offset that, meaning it has S$28.5m net cash.

How Healthy Is Intraco's Balance Sheet?

According to the last reported balance sheet, Intraco had liabilities of S$20.6m due within 12 months, and liabilities of S$1.09m due beyond 12 months. Offsetting this, it had S$38.0m in cash and S$17.9m in receivables that were due within 12 months. So it actually has S$34.2m 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. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Intraco boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Intraco'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.

Over 12 months, Intraco made a loss at the EBIT level, and saw its revenue drop to S$193m, which is a fall of 5.4%. That's not what we would hope to see.

So How Risky Is Intraco?

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 Intraco lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through S$5.1m of cash and made a loss of S$1.3m. Given it only has net cash of S$28.5m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. We've identified 3 warning signs with Intraco (at least 2 which are concerning) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.