Is Pavillon Holdings (SGX:596) A Risky Investment?

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.' 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. We can see that Pavillon Holdings Ltd. (SGX:596) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Pavillon Holdings

What Is Pavillon Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Pavillon Holdings had S$3.75m of debt, an increase on S$1.90m, over one year. However, it does have S$7.26m in cash offsetting this, leading to net cash of S$3.51m.

How Strong Is Pavillon Holdings' Balance Sheet?

The latest balance sheet data shows that Pavillon Holdings had liabilities of S$4.45m due within a year, and liabilities of S$2.27m falling due after that. Offsetting this, it had S$7.26m in cash and S$398.0k in receivables that were due within 12 months. So it can boast S$928.0k more liquid assets than total liabilities.

This surplus suggests that Pavillon Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Pavillon Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Pavillon Holdings will need earnings to service that debt. 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 Pavillon Holdings had a loss before interest and tax, and actually shrunk its revenue by 6.1%, to S$9.3m. We would much prefer see growth.

So How Risky Is Pavillon Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Pavillon Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through S$337k of cash and made a loss of S$5.9m. With only S$3.51m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. To that end, you should learn about the 3 warning signs we've spotted with Pavillon Holdings (including 2 which are significant) .

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.
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