Raffles Infrastructure Holdings (SGX:LUY) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Raffles Infrastructure Holdings Limited (SGX:LUY) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Raffles Infrastructure Holdings

What Is Raffles Infrastructure Holdings's Net Debt?

As you can see below, at the end of December 2021, Raffles Infrastructure Holdings had CN¥136.1m of debt, up from none a year ago. Click the image for more detail. However, it does have CN¥88.4m in cash offsetting this, leading to net debt of about CN¥47.7m.

How Strong Is Raffles Infrastructure Holdings' Balance Sheet?

According to the last reported balance sheet, Raffles Infrastructure Holdings had liabilities of CN¥205.3m due within 12 months, and liabilities of CN¥24.6m due beyond 12 months. Offsetting these obligations, it had cash of CN¥88.4m as well as receivables valued at CN¥36.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥105.4m.

This deficit casts a shadow over the CN¥19.0m 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, Raffles Infrastructure Holdings would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Raffles Infrastructure Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Raffles Infrastructure Holdings had a loss before interest and tax, and actually shrunk its revenue by 85%, to CN¥31m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Raffles Infrastructure Holdings'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 CN¥2.2m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. However, we note that trailing twelve month EBIT is worse than the free cash flow of CN¥35m and the profit of CN¥5.2m. So there is arguably potential that the company is going to turn things around. 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 example Raffles Infrastructure Holdings has 3 warning signs (and 2 which make us uncomfortable) we think 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.