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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Enviro-Hub Holdings Ltd. (SGX:L23) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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, 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.
How Much Debt Does Enviro-Hub Holdings Carry?
As you can see below, Enviro-Hub Holdings had S$102.0m of debt, at June 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$4.14m, its net debt is less, at about S$97.9m.
A Look At Enviro-Hub Holdings's Liabilities
Zooming in on the latest balance sheet data, we can see that Enviro-Hub Holdings had liabilities of S$14.2m due within 12 months and liabilities of S$121.4m due beyond that. On the other hand, it had cash of S$4.14m and S$9.41m worth of receivables due within a year. So its liabilities total S$122.0m more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the S$73.4m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Enviro-Hub Holdings would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Enviro-Hub Holdings'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 Enviro-Hub Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 4.2%, to S$33m. We usually like to see faster growth from unprofitable companies, but each to their own.
Importantly, Enviro-Hub Holdings had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at S$186k. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of S$611k. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Enviro-Hub Holdings (1 is potentially serious!) that you should be aware of before investing here.
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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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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