Here's Why IPC (SGX:AZA) Can Afford Some 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, IPC Corporation Ltd (SGX:AZA) does carry debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for IPC

What Is IPC's Net Debt?

As you can see below, IPC had S$4.68m of debt at June 2022, down from S$8.87m a year prior. However, it also had S$2.16m in cash, and so its net debt is S$2.52m.

How Healthy Is IPC's Balance Sheet?

According to the last reported balance sheet, IPC had liabilities of S$3.33m due within 12 months, and liabilities of S$3.70m due beyond 12 months. Offsetting these obligations, it had cash of S$2.16m as well as receivables valued at S$421.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$4.45m.

While this might seem like a lot, it is not so bad since IPC has a market capitalization of S$11.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. 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 had a loss before interest and tax, and actually shrunk its revenue by 40%, to S$3.7m. To be frank that doesn't bode well.

Caveat Emptor

Not only did IPC's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping S$5.0m. 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. Another cause for caution is that is bled S$811k in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for IPC (of which 2 are a bit unpleasant!) you should know about.

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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