Is ISDN Holdings (SGX:I07) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that ISDN Holdings Limited (SGX:I07) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out 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 December 2020 ISDN Holdings had debt of S$31.7m, up from S$30.3m in one year. But on the other hand it also has S$59.0m in cash, leading to a S$27.3m net cash position.

A Look At ISDN Holdings' Liabilities

We can see from the most recent balance sheet that ISDN Holdings had liabilities of S$129.1m falling due within a year, and liabilities of S$11.3m due beyond that. Offsetting this, it had S$59.0m in cash and S$96.5m in receivables that were due within 12 months. So it actually has S$15.2m 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!

Even more impressive was the fact that ISDN Holdings grew its EBIT by 167% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ISDN Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 40% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case ISDN Holdings has S$27.3m in net cash and a decent-looking balance sheet. And we liked the look of last year's 167% year-on-year EBIT growth. So we don't think ISDN Holdings's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in ISDN Holdings, you may well want to click here to check an interactive graph of its earnings per share history.

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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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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