Is Low Keng Huat (Singapore) (SGX:F1E) Using Debt Sensibly?

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.' 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. As with many other companies Low Keng Huat (Singapore) Limited (SGX:F1E) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Low Keng Huat (Singapore)

What Is Low Keng Huat (Singapore)'s Debt?

The image below, which you can click on for greater detail, shows that Low Keng Huat (Singapore) had debt of S$734.9m at the end of January 2021, a reduction from S$785.6m over a year. However, it does have S$83.9m in cash offsetting this, leading to net debt of about S$651.0m.

How Healthy Is Low Keng Huat (Singapore)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Low Keng Huat (Singapore) had liabilities of S$85.0m due within 12 months and liabilities of S$735.9m due beyond that. On the other hand, it had cash of S$83.9m and S$35.5m worth of receivables due within a year. So its liabilities total S$701.6m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the S$306.6m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Low Keng Huat (Singapore) would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Low Keng Huat (Singapore)'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.

Over 12 months, Low Keng Huat (Singapore) reported revenue of S$73m, which is a gain of 57%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Low Keng Huat (Singapore) managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at S$333k. 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. Not least because it burned through S$36m in negative free cash flow over the last year. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Low Keng Huat (Singapore) (including 2 which don't sit too well with us) .

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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