These 4 Measures Indicate That Sheng Siong Group (SGX:OV8) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Sheng Siong Group Ltd (SGX:OV8) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Sheng Siong Group

What Is Sheng Siong Group's Net Debt?

The image below, which you can click on for greater detail, shows that Sheng Siong Group had debt of S$20.0m at the end of September 2021, a reduction from S$30.0m over a year. However, its balance sheet shows it holds S$235.5m in cash, so it actually has S$215.5m net cash.

How Strong Is Sheng Siong Group's Balance Sheet?

The latest balance sheet data shows that Sheng Siong Group had liabilities of S$242.4m due within a year, and liabilities of S$44.3m falling due after that. 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.

This state of affairs indicates that Sheng Siong Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the S$2.30b company is short on cash, but still worth keeping an eye on the 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!

Also good is that Sheng Siong Group grew its EBIT at 17% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Sheng Siong Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Sheng Siong Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Sheng Siong Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Sheng Siong Group has S$215.5m in net cash. The cherry on top was that in converted 123% of that EBIT to free cash flow, bringing in S$159m. So is Sheng Siong Group's debt a risk? It doesn't seem so to us. 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 example Sheng Siong Group has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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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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.