Would Chasen Holdings (SGX:5NV) Be Better Off With Less Debt?

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 Chasen Holdings Limited (SGX:5NV) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Chasen Holdings

What Is Chasen Holdings's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Chasen Holdings had debt of S$47.9m, up from S$43.0m in one year. However, because it has a cash reserve of S$13.6m, its net debt is less, at about S$34.3m.

How Strong Is Chasen Holdings' Balance Sheet?

According to the last reported balance sheet, Chasen Holdings had liabilities of S$70.0m due within 12 months, and liabilities of S$19.2m due beyond 12 months. On the other hand, it had cash of S$13.6m and S$62.0m worth of receivables due within a year. So its liabilities total S$13.6m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Chasen Holdings has a market capitalization of S$24.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Chasen 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.

Over 12 months, Chasen Holdings made a loss at the EBIT level, and saw its revenue drop to S$103m, which is a fall of 16%. That's not what we would hope to see.

Caveat Emptor

Not only did Chasen 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 S$12m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of S$15m. In the meantime, we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Chasen Holdings (1 doesn't sit too well with us!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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