Does Sakae Holdings (SGX:5DO) 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.' 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, Sakae Holdings Ltd. (SGX:5DO) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sakae Holdings

How Much Debt Does Sakae Holdings Carry?

The image below, which you can click on for greater detail, shows that Sakae Holdings had debt of S$29.3m at the end of March 2022, a reduction from S$37.4m over a year. On the flip side, it has S$3.28m in cash leading to net debt of about S$26.0m.

How Healthy Is Sakae Holdings' Balance Sheet?

We can see from the most recent balance sheet that Sakae Holdings had liabilities of S$31.1m falling due within a year, and liabilities of S$27.9m due beyond that. On the other hand, it had cash of S$3.28m and S$3.69m worth of receivables due within a year. So its liabilities total S$52.0m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the S$10.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Sakae Holdings would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Sakae 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.

Over 12 months, Sakae Holdings made a loss at the EBIT level, and saw its revenue drop to S$17m, which is a fall of 23%. To be frank that doesn't bode well.

Caveat Emptor

While Sakae Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost S$414k at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. However, we note that trailing twelve month EBIT is worse than the free cash flow of S$866k and the profit of S$1.2m. So there is arguably potential that the company is going to turn things around. 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. We've identified 6 warning signs with Sakae Holdings (at least 4 which are concerning) , and understanding them should be part of your investment process.

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.