Is Global Invacom Group (SGX:QS9) 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 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. 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?

What Risk Does Debt Bring?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Global Invacom Group

How Much Debt Does Global Invacom Group Carry?

As you can see below, Global Invacom Group had US$5.49m of debt at December 2022, down from US$6.12m a year prior. However, its balance sheet shows it holds US$9.24m in cash, so it actually has US$3.76m net cash.

A Look At Global Invacom Group's Liabilities

We can see from the most recent balance sheet that Global Invacom Group had liabilities of US$20.2m falling due within a year, and liabilities of US$2.46m due beyond that. On the other hand, it had cash of US$9.24m and US$11.5m worth of receivables due within a year. So its liabilities total US$1.97m more than the combination of its cash and short-term receivables.

Global Invacom Group has a market capitalization of US$7.71m, 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. While it does have liabilities worth noting, Global Invacom Group also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Global Invacom Group's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Global Invacom Group had a loss before interest and tax, and actually shrunk its revenue by 12%, to US$73m. That's not what we would hope to see.

So How Risky Is Global Invacom Group?

While Global Invacom Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$687k. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 example Global Invacom Group has 3 warning signs (and 2 which shouldn't be ignored) we think 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.