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. 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 SHS Holdings Ltd. (SGX:566) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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 SHS Holdings Carry?
As you can see below, SHS Holdings had S$19.4m of debt at June 2019, down from S$24.7m a year prior. But it also has S$27.2m in cash to offset that, meaning it has S$7.78m net cash.
How Healthy Is SHS Holdings's Balance Sheet?
The latest balance sheet data shows that SHS Holdings had liabilities of S$37.9m due within a year, and liabilities of S$16.5m falling due after that. Offsetting these obligations, it had cash of S$27.2m as well as receivables valued at S$38.0m due within 12 months. So it actually has S$10.8m more liquid assets than total liabilities.
This short term liquidity is a sign that SHS Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, SHS Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is SHS Holdings's earnings that will influence how the balance sheet holds up in the future. 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, SHS Holdings made a loss at the EBIT level, and saw its revenue drop to S$35m, which is a fall of 20%. That's not what we would hope to see.
So How Risky Is SHS Holdings?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that SHS Holdings had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through S$25m of cash and made a loss of S$15m. But at least it has S$7.78m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting SHS Holdings insider transactions.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.