Would IPC (SGX:AZA) Be Better Off With Less Debt?

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. 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?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

Check out our latest analysis for IPC

How Much Debt Does IPC Carry?

As you can see below, at the end of December 2020, IPC had S$8.86m of debt, up from S$8.11m a year ago. Click the image for more detail. On the flip side, it has S$8.33m in cash leading to net debt of about S$525.0k.

How Healthy Is IPC's Balance Sheet?

We can see from the most recent balance sheet that IPC had liabilities of S$7.64m falling due within a year, and liabilities of S$3.66m due beyond that. On the other hand, it had cash of S$8.33m and S$392.0k worth of receivables due within a year. So it has liabilities totalling S$2.58m more than its cash and near-term receivables, combined.

Of course, IPC has a market capitalization of S$16.6m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 52%, to S$5.4m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate IPC's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable S$10.0m at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of S$28m. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. 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 4 warning signs for IPC (of which 1 is a bit concerning!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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