Stock Analysis

Here's Why SNC-Lavalin Group (TSE:SNC) Can Afford Some Debt

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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, SNC-Lavalin Group Inc. (TSE:SNC) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for SNC-Lavalin Group

What Is SNC-Lavalin Group's Debt?

The image below, which you can click on for greater detail, shows that SNC-Lavalin Group had debt of CA$1.83b at the end of June 2021, a reduction from CA$2.49b over a year. However, because it has a cash reserve of CA$879.1m, its net debt is less, at about CA$949.3m.

TSX:SNC Debt to Equity History August 11th 2021

How Healthy Is SNC-Lavalin Group's Balance Sheet?

The latest balance sheet data shows that SNC-Lavalin Group had liabilities of CA$3.89b due within a year, and liabilities of CA$3.21b falling due after that. On the other hand, it had cash of CA$879.1m and CA$2.18b worth of receivables due within a year. So its liabilities total CA$4.04b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CA$5.99b, so it does suggest shareholders should keep an eye on SNC-Lavalin Group's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine SNC-Lavalin Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year SNC-Lavalin Group wasn't profitable at an EBIT level, but managed to grow its revenue by 9.0%, to CA$7.1b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months SNC-Lavalin Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CA$21m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$17m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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 instance, we've identified 1 warning sign for SNC-Lavalin Group that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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