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SIA Engineering (SGX:S59) Seems To Use Debt Rather Sparingly

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Simply Wall St
·4 min read
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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. 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. We note that SIA Engineering Company Limited (SGX:S59) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for SIA Engineering

What Is SIA Engineering's Net Debt?

As you can see below, SIA Engineering had S$13.2m of debt at March 2020, down from S$19.3m a year prior. But on the other hand it also has S$519.7m in cash, leading to a S$506.5m net cash position.

SGX:S59 Historical Debt May 26th 2020
SGX:S59 Historical Debt May 26th 2020

How Strong Is SIA Engineering's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SIA Engineering had liabilities of S$240.8m due within 12 months and liabilities of S$103.7m due beyond that. Offsetting this, it had S$519.7m in cash and S$400.1m in receivables that were due within 12 months. So it can boast S$575.3m more liquid assets than total liabilities.

This excess liquidity is a great indication that SIA Engineering's balance sheet is just as strong as racists are weak. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Simply put, the fact that SIA Engineering has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that SIA Engineering has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if SIA Engineering can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. SIA Engineering may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, SIA Engineering produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that SIA Engineering has net cash of S$506.5m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 24% over the last year. So we don't think SIA Engineering's use of debt 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with SIA Engineering (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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.

Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.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. 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.