Stock Analysis

Does Straco (SGX:S85) Have A Healthy Balance Sheet?

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Warren Buffett famously said, '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. We note that Straco Corporation Limited (SGX:S85) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out the opportunities and risks within the SG Hospitality industry.

What Is Straco's Net Debt?

As you can see below, Straco had S$8.52m of debt at June 2022, down from S$21.7m a year prior. But on the other hand it also has S$157.0m in cash, leading to a S$148.4m net cash position.

SGX:S85 Debt to Equity History November 17th 2022

A Look At Straco's Liabilities

According to the last reported balance sheet, Straco had liabilities of S$10.1m due within 12 months, and liabilities of S$71.6m due beyond 12 months. On the other hand, it had cash of S$157.0m and S$5.19m worth of receivables due within a year. So it actually has S$80.4m more liquid assets than total liabilities.

This excess liquidity suggests that Straco is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Straco has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Straco 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 Straco had a loss before interest and tax, and actually shrunk its revenue by 35%, to S$29m. That makes us nervous, to say the least.

So How Risky Is Straco?

While Straco lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow S$3.6m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. We've identified 3 warning signs with Straco , and understanding them should be part of your investment process.

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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Find out whether Straco is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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