Would SNC-Lavalin Group (TSE:SNC) Be Better Off With Less Debt?

By
Simply Wall St
Published
February 21, 2022
TSX:SNC
Source: Shutterstock

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that SNC-Lavalin Group Inc. (TSE:SNC) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for SNC-Lavalin Group

What Is SNC-Lavalin Group's Debt?

You can click the graphic below for the historical numbers, but it shows that SNC-Lavalin Group had CA$1.87b of debt in September 2021, down from CA$2.25b, one year before. However, because it has a cash reserve of CA$519.8m, its net debt is less, at about CA$1.35b.

debt-equity-history-analysis
TSX:SNC Debt to Equity History February 21st 2022

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

We can see from the most recent balance sheet that SNC-Lavalin Group had liabilities of CA$3.65b falling due within a year, and liabilities of CA$3.21b due beyond that. Offsetting these obligations, it had cash of CA$519.8m as well as receivables valued at CA$2.35b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$3.99b.

This is a mountain of leverage relative to its market capitalization of CA$5.02b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if SNC-Lavalin Group can strengthen its balance sheet over time. 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 22%, to CA$7.1b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, SNC-Lavalin Group still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CA$120m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CA$207m. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - SNC-Lavalin Group has 1 warning sign we think you should be aware of.

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.

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