Is SHS Holdings (SGX:566) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, SHS Holdings Ltd. (SGX:566) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

See our latest analysis for SHS Holdings

How Much Debt Does SHS Holdings Carry?

The image below, which you can click on for greater detail, shows that at December 2020 SHS Holdings had debt of S$21.8m, up from S$19.4m in one year. But on the other hand it also has S$31.7m in cash, leading to a S$9.93m net cash position.

A Look At SHS Holdings' Liabilities

According to the last reported balance sheet, SHS Holdings had liabilities of S$114.0m due within 12 months, and liabilities of S$18.0m due beyond 12 months. On the other hand, it had cash of S$31.7m and S$26.7m worth of receivables due within a year. So its liabilities total S$73.6m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of S$109.6m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, SHS Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since SHS Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, SHS Holdings reported revenue of S$35m, which is a gain of 33%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is SHS Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that SHS Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through S$7.3m of cash and made a loss of S$17m. However, it has net cash of S$9.93m, so it has a bit of time before it will need more capital. SHS Holdings's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for SHS Holdings (1 can't be ignored) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. 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.
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