In Win Development (TPE:6117) Is Making Moderate Use Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 In Win Development Inc. (TPE:6117) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for In Win Development

How Much Debt Does In Win Development Carry?

The image below, which you can click on for greater detail, shows that at September 2020 In Win Development had debt of NT$1.34b, up from NT$870.0m in one year. However, because it has a cash reserve of NT$748.9m, its net debt is less, at about NT$586.1m.

How Healthy Is In Win Development's Balance Sheet?

According to the last reported balance sheet, In Win Development had liabilities of NT$1.58b due within 12 months, and liabilities of NT$518.4m due beyond 12 months. Offsetting this, it had NT$748.9m in cash and NT$438.7m in receivables that were due within 12 months. So it has liabilities totalling NT$908.7m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of NT$1.49b, so it does suggest shareholders should keep an eye on In Win Development's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since In Win Development 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 In Win Development wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to NT$2.3b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, In Win Development had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost NT$39m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of NT$50m into a profit. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for In Win Development you should be aware of.

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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