Is Sakae Holdings (SGX:5DO) 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 note that Sakae Holdings Ltd. (SGX:5DO) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Sakae Holdings

What Is Sakae Holdings's Debt?

The image below, which you can click on for greater detail, shows that Sakae Holdings had debt of S$29.0m at the end of June 2022, a reduction from S$33.1m over a year. However, it also had S$8.68m in cash, and so its net debt is S$20.3m.

How Healthy Is Sakae Holdings' Balance Sheet?

According to the last reported balance sheet, Sakae Holdings had liabilities of S$31.6m due within 12 months, and liabilities of S$27.5m due beyond 12 months. Offsetting this, it had S$8.68m in cash and S$1.11m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$49.3m.

This deficit casts a shadow over the S$14.3m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Sakae Holdings would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. 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.

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 19%. That's not what we would hope to see.

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$1.4m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But on the bright side the company actually produced a statutory profit of S$1.1m and free cash flow of S$735k. So there is arguably potential that the company is going to turn things around. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Sakae Holdings (of which 1 is a bit unpleasant!) you should know about.

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.