Does ISDN Holdings (SGX:I07) Have A Healthy Balance Sheet?

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.' 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. As with many other companies ISDN Holdings Limited (SGX:I07) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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

See our latest analysis for ISDN Holdings

How Much Debt Does ISDN Holdings Carry?

The image below, which you can click on for greater detail, shows that at June 2020 ISDN Holdings had debt of S$35.7m, up from S$27.4m in one year. However, its balance sheet shows it holds S$53.0m in cash, so it actually has S$17.2m net cash.

How Healthy Is ISDN Holdings's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ISDN Holdings had liabilities of S$117.5m due within 12 months and liabilities of S$17.7m due beyond that. Offsetting this, it had S$53.0m in cash and S$88.9m in receivables that were due within 12 months. So it can boast S$6.72m more liquid assets than total liabilities.

This surplus suggests that ISDN Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, ISDN Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that ISDN Holdings has boosted its EBIT by 56%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if ISDN Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While ISDN Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, ISDN Holdings recorded free cash flow of 42% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case ISDN Holdings has S$17.2m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 56% over the last year. So we don't think ISDN Holdings's use of debt is risky. Another factor that would give us confidence in ISDN Holdings would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

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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