Sakae Holdings (SGX:5DO) Has Debt But No Earnings; Should You Worry?

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 the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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.

See 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$24.8m at the end of June 2023, a reduction from S$29.0m over a year. However, it also had S$6.58m in cash, and so its net debt is S$18.2m.

A Look At Sakae Holdings' Liabilities

According to the last reported balance sheet, Sakae Holdings had liabilities of S$27.6m due within 12 months, and liabilities of S$25.3m due beyond 12 months. Offsetting this, it had S$6.58m in cash and S$652.0k in receivables that were due within 12 months. So it has liabilities totalling S$45.6m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the S$18.8m company, like a colossus towering over mere mortals. 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sakae Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Sakae Holdings saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Sakae Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost S$298k at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. But on the bright side the company actually produced a statutory profit of S$1.3m and free cash flow of S$1.2m. So one might argue that there's still a chance it can get things on the right track. 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. To that end, you should learn about the 3 warning signs we've spotted with Sakae Holdings (including 1 which is a bit concerning) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.