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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Pavillon Holdings Ltd. (SGX:596) does carry debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Pavillon Holdings

What Is Pavillon Holdings's Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Pavillon Holdings had debt of S$2.43m, up from S$1.78m in one year. But it also has S$6.87m in cash to offset that, meaning it has S$4.44m net cash.

A Look At Pavillon Holdings' Liabilities

We can see from the most recent balance sheet that Pavillon Holdings had liabilities of S$6.18m falling due within a year, and liabilities of S$2.52m due beyond that. Offsetting this, it had S$6.87m in cash and S$181.0k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$1.66m.

Given Pavillon Holdings has a market capitalization of S$12.8m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Pavillon Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Pavillon Holdings'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.

In the last year Pavillon Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 10%, to S$9.4m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Pavillon Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Pavillon Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through S$1.1m of cash and made a loss of S$16m. With only S$4.44m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 a bit concerning) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.