Is InvesTech Holdings (HKG:1087) Weighed On By Its Debt Load?

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 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. We can see that InvesTech Holdings Limited (HKG:1087) does use debt in its business. But should shareholders be worried about its use of debt?

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does InvesTech Holdings Carry?

As you can see below, InvesTech Holdings had CN¥221.7m of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CN¥108.9m in cash leading to net debt of about CN¥112.8m.

How Healthy Is InvesTech Holdings' Balance Sheet?

According to the last reported balance sheet, InvesTech Holdings had liabilities of CN¥459.9m due within 12 months, and liabilities of CN¥9.69m due beyond 12 months. Offsetting these obligations, it had cash of CN¥108.9m as well as receivables valued at CN¥280.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥80.1m.

Given this deficit is actually higher than the company's market capitalization of CN¥56.0m, we think shareholders really should watch InvesTech Holdings's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since InvesTech Holdings 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.

See our latest analysis for InvesTech Holdings

Over 12 months, InvesTech Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥466m, which is a fall of 17%. That's not what we would hope to see.

Caveat Emptor

While InvesTech Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥30m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of CN¥64m. In the meantime, we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with InvesTech Holdings .

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.