Does Southern Archipelago (SGX:A33) Have A Healthy Balance Sheet?

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.' 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. We note that Southern Archipelago Ltd. (SGX:A33) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Southern Archipelago

What Is Southern Archipelago's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Southern Archipelago had S$7.45m of debt, an increase on S$5.51m, over one year. However, it does have S$7.40m in cash offsetting this, leading to net debt of about S$58.1k.

How Healthy Is Southern Archipelago's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Southern Archipelago had liabilities of S$7.96m due within 12 months and liabilities of S$1.81m due beyond that. Offsetting these obligations, it had cash of S$7.40m as well as receivables valued at S$486.0k due within 12 months. So it has liabilities totalling S$1.88m more than its cash and near-term receivables, combined.

Since publicly traded Southern Archipelago shares are worth a total of S$55.1m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, Southern Archipelago has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But it is Southern Archipelago'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.

Over 12 months, Southern Archipelago reported revenue of S$4.9m, which is a gain of 26%, 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.

Caveat Emptor

Despite the top line growth, Southern Archipelago still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at S$2.0m. 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. Another cause for caution is that is bled S$1.4m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. Be aware that Southern Archipelago is showing 4 warning signs in our investment analysis , and 2 of those can't be ignored...

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.