Health Check: How Prudently Does Sakae Holdings (SGX:5DO) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, Sakae Holdings Ltd. (SGX:5DO) does carry debt. But the real question is whether this debt is making the company risky.

Our free stock report includes 2 warning signs investors should be aware of before investing in Sakae Holdings. Read for free now.

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Sakae Holdings's Debt?

As you can see below, Sakae Holdings had S$20.3m of debt at December 2024, down from S$21.6m a year prior. However, it also had S$2.69m in cash, and so its net debt is S$17.6m.

How Strong Is Sakae Holdings' Balance Sheet?

According to the last reported balance sheet, Sakae Holdings had liabilities of S$25.1m due within 12 months, and liabilities of S$26.1m due beyond 12 months. Offsetting this, it had S$2.69m in cash and S$1.41m in receivables that were due within 12 months. So it has liabilities totalling S$47.2m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the S$14.6m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Sakae Holdings would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sakae 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.

Check out our latest analysis for Sakae Holdings

In the last year Sakae Holdings had a loss before interest and tax, and actually shrunk its revenue by 9.5%, to S$14m. We would much prefer see growth.

Caveat Emptor

Importantly, Sakae Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable S$1.7m 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. But we think that is unlikely since it is low on liquid assets, and made a loss of S$3.6m in the last year. So we think this stock is quite risky. We'd prefer to pass. 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 Sakae Holdings has 2 warning signs (and 1 which is concerning) we think you should know about.

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.

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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.