Does Soilbuild Construction Group (SGX:S7P) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Soilbuild Construction Group Ltd. (SGX:S7P) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Soilbuild Construction Group

How Much Debt Does Soilbuild Construction Group Carry?

The chart below, which you can click on for greater detail, shows that Soilbuild Construction Group had S$96.0m in debt in June 2022; about the same as the year before. However, because it has a cash reserve of S$19.9m, its net debt is less, at about S$76.1m.

How Healthy Is Soilbuild Construction Group's Balance Sheet?

We can see from the most recent balance sheet that Soilbuild Construction Group had liabilities of S$183.1m falling due within a year, and liabilities of S$36.5m due beyond that. Offsetting this, it had S$19.9m in cash and S$86.9m in receivables that were due within 12 months. So its liabilities total S$112.7m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the S$42.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Soilbuild Construction Group 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 Soilbuild Construction Group'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 Soilbuild Construction Group wasn't profitable at an EBIT level, but managed to grow its revenue by 30%, to S$271m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Soilbuild Construction Group still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping S$13m. 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. Nevertheless, we would not bet on it given that it vaporized S$2.0m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Soilbuild Construction Group (2 are potentially serious) 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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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.