Is Intraco (SGX:I06) Using Too Much 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.' 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. Importantly, Intraco Limited (SGX:I06) does carry debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for Intraco

How Much Debt Does Intraco Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Intraco had S$13.8m of debt, an increase on S$7.38m, over one year. But on the other hand it also has S$55.4m in cash, leading to a S$41.6m net cash position.

A Look At Intraco's Liabilities

The latest balance sheet data shows that Intraco had liabilities of S$31.4m due within a year, and liabilities of S$1.39m falling due after that. On the other hand, it had cash of S$55.4m and S$17.5m worth of receivables due within a year. So it can boast S$40.0m 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. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Intraco boasts net cash, so it's fair to say it does not have a heavy debt load! 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 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 saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

So How Risky Is Intraco?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Intraco lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of S$3.5m and booked a S$13m accounting loss. With only S$41.6m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For instance, we've identified 2 warning signs for Intraco (1 makes us a bit uncomfortable) you should be aware of.

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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