Is Heeton Holdings (SGX:5DP) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Heeton Holdings Limited (SGX:5DP) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Heeton Holdings

How Much Debt Does Heeton Holdings Carry?

The image below, which you can click on for greater detail, shows that at June 2021 Heeton Holdings had debt of S$587.3m, up from S$448.9m in one year. However, it does have S$88.1m in cash offsetting this, leading to net debt of about S$499.3m.

A Look At Heeton Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Heeton Holdings had liabilities of S$110.6m due within 12 months and liabilities of S$551.8m due beyond that. On the other hand, it had cash of S$88.1m and S$62.5m worth of receivables due within a year. So its liabilities total S$511.8m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the S$148.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Heeton 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 Heeton 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.

In the last year Heeton Holdings had a loss before interest and tax, and actually shrunk its revenue by 36%, to S$31m. To be frank that doesn't bode well.

Caveat Emptor

While Heeton 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. To be specific the EBIT loss came in at S$4.9m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through S$13m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Heeton Holdings (of which 2 can't be ignored!) you should know about.

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. 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.
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