Is Enviro-Hub Holdings (SGX:L23) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Enviro-Hub Holdings Ltd. (SGX:L23) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

See our latest analysis for Enviro-Hub Holdings

How Much Debt Does Enviro-Hub Holdings Carry?

As you can see below, Enviro-Hub Holdings had S$96.4m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of S$17.3m, its net debt is less, at about S$79.2m.

How Strong Is Enviro-Hub Holdings' Balance Sheet?

According to the last reported balance sheet, Enviro-Hub Holdings had liabilities of S$16.3m due within 12 months, and liabilities of S$109.4m due beyond 12 months. On the other hand, it had cash of S$17.3m and S$4.50m worth of receivables due within a year. So it has liabilities totalling S$104.0m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of S$93.0m, we think shareholders really should watch Enviro-Hub Holdings's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Enviro-Hub 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.

Over 12 months, Enviro-Hub Holdings made a loss at the EBIT level, and saw its revenue drop to S$31m, which is a fall of 10%. We would much prefer see growth.

Caveat Emptor

Not only did Enviro-Hub Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost S$1.3m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of S$990k didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Enviro-Hub Holdings you should know about.

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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