Global Invacom Group (SGX:QS9) Has A Pretty Healthy Balance Sheet

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 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. As with many other companies Global Invacom Group Limited (SGX:QS9) 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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Global Invacom Group

How Much Debt Does Global Invacom Group Carry?

The image below, which you can click on for greater detail, shows that Global Invacom Group had debt of US$3.88m at the end of December 2020, a reduction from US$8.93m over a year. However, its balance sheet shows it holds US$11.3m in cash, so it actually has US$7.39m net cash.

How Strong Is Global Invacom Group's Balance Sheet?

We can see from the most recent balance sheet that Global Invacom Group had liabilities of US$23.8m falling due within a year, and liabilities of US$5.61m due beyond that. Offsetting these obligations, it had cash of US$11.3m as well as receivables valued at US$12.7m due within 12 months. So its liabilities total US$5.45m more than the combination of its cash and short-term receivables.

Global Invacom Group has a market capitalization of US$19.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Global Invacom Group boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Global Invacom Group improved its EBIT from a last year's loss to a positive US$1.6m. 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 Global Invacom Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Global Invacom Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Global Invacom Group actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While Global Invacom Group does have more liabilities than liquid assets, it also has net cash of US$7.39m. The cherry on top was that in converted 464% of that EBIT to free cash flow, bringing in US$7.6m. So we don't have any problem with Global Invacom Group's use of debt. 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 1 warning sign for Global Invacom Group 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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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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