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

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.' 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. As with many other companies Low Keng Huat (Singapore) Limited (SGX:F1E) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

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

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

You can click the graphic below for the historical numbers, but it shows that Low Keng Huat (Singapore) had S$630.8m of debt in July 2022, down from S$736.6m, one year before. On the flip side, it has S$55.7m in cash leading to net debt of about S$575.1m.

A Look At Low Keng Huat (Singapore)'s Liabilities

The latest balance sheet data shows that Low Keng Huat (Singapore) had liabilities of S$204.9m due within a year, and liabilities of S$465.2m falling due after that. Offsetting these obligations, it had cash of S$55.7m as well as receivables valued at S$39.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$574.8m.

The deficiency here weighs heavily on the S$299.2m 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 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Low Keng Huat (Singapore) 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.

In the last year Low Keng Huat (Singapore) had a loss before interest and tax, and actually shrunk its revenue by 12%, to S$122m. We would much prefer see growth.

Caveat Emptor

While Low Keng Huat (Singapore)'s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping S$44m. 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$28m 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. For example Low Keng Huat (Singapore) has 3 warning signs (and 2 which are a bit unpleasant) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.