Is Straco (SGX:S85) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Straco Corporation Limited (SGX:S85) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Straco

What Is Straco's Debt?

As you can see below, Straco had S$22.9m of debt at December 2020, down from S$25.9m a year prior. However, its balance sheet shows it holds S$177.7m in cash, so it actually has S$154.8m net cash.

How Healthy Is Straco's Balance Sheet?

We can see from the most recent balance sheet that Straco had liabilities of S$30.3m falling due within a year, and liabilities of S$70.9m due beyond that. Offsetting these obligations, it had cash of S$177.7m as well as receivables valued at S$3.89m due within 12 months. So it can boast S$80.4m more liquid assets than total liabilities.

This excess liquidity suggests that Straco is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Straco's earnings that will influence how the balance sheet holds up in the future. 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, Straco made a loss at the EBIT level, and saw its revenue drop to S$30m, which is a fall of 73%. That makes us nervous, to say the least.

So How Risky Is Straco?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Straco lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through S$5.1m of cash and made a loss of S$976k. Given it only has net cash of S$154.8m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Straco has 1 warning sign we think you should be aware of.

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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