Does Lion Asiapac (SGX:BAZ) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Lion Asiapac Limited (SGX:BAZ) does carry debt. But should shareholders be worried about its use of debt?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Lion Asiapac

What Is Lion Asiapac's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Lion Asiapac had S$5.51m of debt, an increase on none, over one year. But it also has S$40.1m in cash to offset that, meaning it has S$34.6m net cash.

How Healthy Is Lion Asiapac's Balance Sheet?

We can see from the most recent balance sheet that Lion Asiapac had liabilities of S$10.1m falling due within a year, and liabilities of S$1.62m due beyond that. Offsetting these obligations, it had cash of S$40.1m as well as receivables valued at S$8.51m due within 12 months. So it actually has S$36.9m more liquid assets than total liabilities.

This surplus strongly suggests that Lion Asiapac has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Lion Asiapac 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 Lion Asiapac'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.

In the last year Lion Asiapac wasn't profitable at an EBIT level, but managed to grow its revenue by 51%, to S$36m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Lion Asiapac?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Lion Asiapac had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through S$3.1m of cash and made a loss of S$1.7m. But the saving grace is the S$34.6m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Lion Asiapac's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. We've identified 3 warning signs with Lion Asiapac (at least 2 which are potentially serious) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.