Is Skyline Investments (TLV:SKLN) Weighed On By Its Debt Load?

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 Skyline Investments Inc. (TLV:SKLN) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Skyline Investments

What Is Skyline Investments's Debt?

As you can see below, Skyline Investments had CA$290.6m of debt at March 2021, down from CA$339.1m a year prior. However, it does have CA$24.1m in cash offsetting this, leading to net debt of about CA$266.5m.

How Strong Is Skyline Investments' Balance Sheet?

According to the last reported balance sheet, Skyline Investments had liabilities of CA$98.4m due within 12 months, and liabilities of CA$277.1m due beyond 12 months. On the other hand, it had cash of CA$24.1m and CA$24.8m worth of receivables due within a year. So its liabilities total CA$326.5m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CA$107.1m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Skyline Investments would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Skyline Investments's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Skyline Investments had a loss before interest and tax, and actually shrunk its revenue by 64%, to CA$89m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Skyline Investments's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CA$15m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through CA$13m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Skyline Investments (of which 2 can't be ignored!) you should know about.

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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