Here's Why IPC (SGX:AZA) Can Afford Some Debt

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.' 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. We can see that IPC Corporation Ltd (SGX:AZA) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. 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 IPC

What Is IPC's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 IPC had S$8.87m of debt, an increase on S$8.23m, over one year. On the flip side, it has S$7.17m in cash leading to net debt of about S$1.70m.

How Strong Is IPC's Balance Sheet?

The latest balance sheet data shows that IPC had liabilities of S$7.06m due within a year, and liabilities of S$3.96m falling due after that. Offsetting these obligations, it had cash of S$7.17m as well as receivables valued at S$578.0k due within 12 months. So it has liabilities totalling S$3.27m more than its cash and near-term receivables, combined.

This deficit isn't so bad because IPC is worth S$14.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since IPC 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 IPC wasn't profitable at an EBIT level, but managed to grow its revenue by 145%, to S$6.2m. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Despite the top line growth, IPC still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping S$9.2m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of S$11m into a profit. In the meantime, we consider the stock very risky. 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. For instance, we've identified 3 warning signs for IPC (1 makes us a bit uncomfortable) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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