Is Thakral (SGX:AWI) A Risky Investment?

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. Importantly, Thakral Corporation Ltd (SGX:AWI) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Our analysis indicates that AWI is potentially undervalued!

What Is Thakral's Net Debt?

The image below, which you can click on for greater detail, shows that Thakral had debt of S$50.7m at the end of June 2022, a reduction from S$58.2m over a year. However, it does have S$27.9m in cash offsetting this, leading to net debt of about S$22.8m.

How Healthy Is Thakral's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Thakral had liabilities of S$67.8m due within 12 months and liabilities of S$29.8m due beyond that. Offsetting this, it had S$27.9m in cash and S$21.6m in receivables that were due within 12 months. So its liabilities total S$48.0m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of S$63.5m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Thakral's earnings that will influence how the balance sheet holds up in the future. 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 Thakral wasn't profitable at an EBIT level, but managed to grow its revenue by 20%, to S$130m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Thakral had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost S$2.1m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled S$12m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. For example Thakral has 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.