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. We can see that SNC-Lavalin Group Inc. (TSE:SNC) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does SNC-Lavalin Group Carry?
As you can see below, SNC-Lavalin Group had CA$2.00b of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had CA$1.05b in cash, and so its net debt is CA$948.8m.
A Look At SNC-Lavalin Group's Liabilities
We can see from the most recent balance sheet that SNC-Lavalin Group had liabilities of CA$4.27b falling due within a year, and liabilities of CA$3.50b due beyond that. On the other hand, it had cash of CA$1.05b and CA$2.48b worth of receivables due within a year. So its liabilities total CA$4.24b more than the combination of its cash and short-term receivables.
This is a mountain of leverage relative to its market capitalization of CA$4.80b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year SNC-Lavalin Group had a loss before interest and tax, and actually shrunk its revenue by 8.4%, to CA$7.0b. We would much prefer see growth.
Importantly, SNC-Lavalin Group had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CA$199m. 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. We would feel better if it turned its trailing twelve month loss of CA$356m into a profit. So we do think this stock is quite 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. Be aware that SNC-Lavalin Group is showing 1 warning sign in our investment analysis , 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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