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Here’s Why Infinity Logistics and Transport Ventures (HKG:1442) Can Manage Its Debt Responsibly – Simply Wall St News

Legendary fund manager Li Lu (who Charlie Munger backed) once said, ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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. We can see that Infinity Logistics and Transport Ventures Limited (HKG:1442) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first step when considering a company’s debt levels is to consider its cash and debt together.

View our latest analysis for Infinity Logistics and Transport Ventures

What Is Infinity Logistics and Transport Ventures’s Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2019 Infinity Logistics and Transport Ventures had RM69.3m of debt, an increase on RM43.5m, over one year. However, because it has a cash reserve of RM17.2m, its net debt is less, at about RM52.1m.

SEHK:1442 Historical Debt June 15th 2020
SEHK:1442 Historical Debt June 15th 2020

How Strong Is Infinity Logistics and Transport Ventures’s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Infinity Logistics and Transport Ventures had liabilities of RM64.2m due within 12 months and liabilities of RM70.6m due beyond that. Offsetting this, it had RM17.2m in cash and RM42.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM74.7m.

While this might seem like a lot, it is not so bad since Infinity Logistics and Transport Ventures has a market capitalization of RM324.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Infinity Logistics and Transport Ventures has net debt of just 1.3 times EBITDA, indicating that it is certainly not a reckless borrower. And it boasts interest cover of 8.1 times, which is more than adequate. Another good sign is that Infinity Logistics and Transport Ventures has been able to increase its EBIT by 21% in twelve months, making it easier to pay down debt. There’s no doubt that we learn most about debt from the balance sheet. But it is Infinity Logistics and Transport Ventures’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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don’t cut it. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Infinity Logistics and Transport Ventures recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Our View

Infinity Logistics and Transport Ventures’s conversion of EBIT to free cash flow was a real negative on this analysis, although the other factors we considered were considerably better. There’s no doubt that its ability to to grow its EBIT is pretty flash. When we consider all the factors mentioned above, we do feel a bit cautious about Infinity Logistics and Transport Ventures’s use of debt. While we appreciate debt can enhance returns on equity, we’d suggest that shareholders keep close watch on its debt levels, lest they increase. 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. For instance, we’ve identified 2 warning signs for Infinity Logistics and Transport Ventures that 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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This article by Simply Wall St is general in nature. 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. Thank you for reading.

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