Casa Holdings (SGX:C04) Has Debt But No Earnings; Should You Worry?

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 Casa Holdings Limited (SGX:C04) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Casa Holdings

How Much Debt Does Casa Holdings Carry?

As you can see below, at the end of March 2021, Casa Holdings had S$33.1m of debt, up from S$30.1m a year ago. Click the image for more detail. However, it also had S$5.04m in cash, and so its net debt is S$28.1m.

How Strong Is Casa Holdings' Balance Sheet?

The latest balance sheet data shows that Casa Holdings had liabilities of S$5.75m due within a year, and liabilities of S$34.0m falling due after that. Offsetting this, it had S$5.04m in cash and S$3.00m in receivables that were due within 12 months. So it has liabilities totalling S$31.7m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the S$17.2m 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'd watch its balance sheet closely, without a doubt. After all, Casa Holdings would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Casa Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Casa Holdings made a loss at the EBIT level, and saw its revenue drop to S$16m, which is a fall of 6.8%. That's not what we would hope to see.

Caveat Emptor

Importantly, Casa Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable S$1.9m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of S$1.1m and the profit of S$1.6m. So one might argue that there's still a chance it can get things on the right track. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 6 warning signs we've spotted with Casa Holdings (including 2 which don't sit too well with us) .

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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