Is Singularity Future Technology (NASDAQ:SGLY) Using Debt Sensibly?
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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Singularity Future Technology Ltd. (NASDAQ:SGLY) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Singularity Future Technology
What Is Singularity Future Technology's Debt?
The image below, which you can click on for greater detail, shows that at December 2021 Singularity Future Technology had debt of US$10.0m, up from US$280.5k in one year. However, its balance sheet shows it holds US$51.4m in cash, so it actually has US$41.4m net cash.
A Look At Singularity Future Technology's Liabilities
The latest balance sheet data shows that Singularity Future Technology had liabilities of US$5.41m due within a year, and liabilities of US$11.0m falling due after that. On the other hand, it had cash of US$51.4m and US$66.0k worth of receivables due within a year. So it actually has US$35.0m more liquid assets than total liabilities.
This short term liquidity is a sign that Singularity Future Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Singularity Future Technology has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Singularity Future Technology'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.
Over 12 months, Singularity Future Technology made a loss at the EBIT level, and saw its revenue drop to US$5.0m, which is a fall of 14%. We would much prefer see growth.
So How Risky Is Singularity Future Technology?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Singularity Future Technology had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$8.6m of cash and made a loss of US$17m. Given it only has net cash of US$41.4m, the company may need to raise more capital if it doesn't reach break-even soon. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Singularity Future Technology has 4 warning signs (and 2 which are a bit unpleasant) we think you should know about.
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. 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.
