Is Global Invacom Group (SGX:QS9) Using Too Much 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. As with many other companies Global Invacom Group Limited (SGX:QS9) makes use of debt. But the real question is whether this debt is making the company risky.

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 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. 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.

Our analysis indicates that QS9 is potentially undervalued!

What Is Global Invacom Group's Debt?

The image below, which you can click on for greater detail, shows that Global Invacom Group had debt of US$5.71m at the end of June 2022, a reduction from US$6.20m over a year. But on the other hand it also has US$10.0m in cash, leading to a US$4.29m net cash position.

How Strong Is Global Invacom Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Global Invacom Group had liabilities of US$23.4m due within 12 months and liabilities of US$3.71m due beyond that. On the other hand, it had cash of US$10.0m and US$15.4m worth of receivables due within a year. So its liabilities total US$1.70m more than the combination of its cash and short-term receivables.

Of course, Global Invacom Group has a market capitalization of US$10.5m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Global Invacom Group boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, Global Invacom Group made a loss at the EBIT level, and saw its revenue drop to US$80m, which is a fall of 12%. We would much prefer see growth.

So How Risky Is Global Invacom Group?

Although Global Invacom Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$2.9m. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Global Invacom Group (1 is concerning!) that you should be aware of before investing here.

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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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.