Sheng Siong Group (SGX:OV8) Could Easily Take On More 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Sheng Siong Group Ltd (SGX:OV8) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Sheng Siong Group

How Much Debt Does Sheng Siong Group Carry?

You can click the graphic below for the historical numbers, but it shows that Sheng Siong Group had S$20.0m of debt in September 2021, down from S$30.0m, one year before. However, its balance sheet shows it holds S$235.5m in cash, so it actually has S$215.5m net cash.

A Look At Sheng Siong Group's Liabilities

According to the last reported balance sheet, Sheng Siong Group had liabilities of S$242.4m due within 12 months, and liabilities of S$44.3m due beyond 12 months. On the other hand, it had cash of S$235.5m and S$10.7m worth of receivables due within a year. So it has liabilities totalling S$40.4m more than its cash and near-term receivables, combined.

Having regard to Sheng Siong Group's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the S$2.15b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Sheng Siong Group boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Sheng Siong Group grew its EBIT by 17% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Sheng Siong Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Sheng Siong Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Sheng Siong Group actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

We could understand if investors are concerned about Sheng Siong Group's liabilities, but we can be reassured by the fact it has has net cash of S$215.5m. And it impressed us with free cash flow of S$159m, being 123% of its EBIT. So we don't think Sheng Siong Group's use of debt is risky. 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. We've identified 2 warning signs with Sheng Siong Group (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

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