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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Invengo Information Technology Co.,Ltd. (SZSE:002161) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Invengo Information TechnologyLtd
How Much Debt Does Invengo Information TechnologyLtd Carry?
As you can see below, Invengo Information TechnologyLtd had CN¥745.8m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥509.3m in cash, and so its net debt is CN¥236.5m.
How Strong Is Invengo Information TechnologyLtd's Balance Sheet?
We can see from the most recent balance sheet that Invengo Information TechnologyLtd had liabilities of CN¥757.1m falling due within a year, and liabilities of CN¥441.5m due beyond that. On the other hand, it had cash of CN¥509.3m and CN¥256.2m worth of receivables due within a year. So its liabilities total CN¥433.1m more than the combination of its cash and short-term receivables.
Of course, Invengo Information TechnologyLtd has a market capitalization of CN¥4.68b, 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. There's no doubt that we learn most about debt from the balance sheet. But it is Invengo Information TechnologyLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Invengo Information TechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 6.1%, to CN¥555m. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Importantly, Invengo Information TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥24m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥27m of cash over the last year. So to be blunt we think it is risky. 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 - Invengo Information TechnologyLtd has 1 warning sign we think you should be aware of.
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.