Health Check: How Prudently Does Soilbuild Construction Group (SGX:S7P) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Soilbuild Construction Group Ltd. (SGX:S7P) does carry debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. 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

What Is Soilbuild Construction Group's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Soilbuild Construction Group had debt of S$82.3m, up from S$73.1m in one year. On the flip side, it has S$21.8m in cash leading to net debt of about S$60.5m.

How Healthy Is Soilbuild Construction Group's Balance Sheet?

According to the last reported balance sheet, Soilbuild Construction Group had liabilities of S$130.5m due within 12 months, and liabilities of S$64.8m due beyond 12 months. Offsetting these obligations, it had cash of S$21.8m as well as receivables valued at S$62.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$111.1m.

The deficiency here weighs heavily on the S$60.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Soilbuild Construction Group would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. 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 had a loss before interest and tax, and actually shrunk its revenue by 37%, to S$149m. That makes us nervous, to say the least.

Caveat Emptor

While Soilbuild Construction Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable S$38m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of S$9.3m over the last twelve months. So suffice it to say we consider the stock to be risky. 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. To that end, you should learn about the 3 warning signs we've spotted with Soilbuild Construction Group (including 2 which are a bit unpleasant) .

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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