Is Casa Holdings (SGX:C04) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Casa Holdings Limited (SGX:C04) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Casa Holdings

How Much Debt Does Casa Holdings Carry?

As you can see below, Casa Holdings had S$31.5m of debt at September 2022, down from S$34.5m a year prior. On the flip side, it has S$3.95m in cash leading to net debt of about S$27.6m.

How Healthy Is Casa Holdings' Balance Sheet?

According to the last reported balance sheet, Casa Holdings had liabilities of S$6.81m due within 12 months, and liabilities of S$31.4m due beyond 12 months. Offsetting these obligations, it had cash of S$3.95m as well as receivables valued at S$2.91m due within 12 months. So it has liabilities totalling S$31.4m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the S$17.0m 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. At the end of the day, Casa Holdings 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 it is Casa Holdings'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 Casa Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to S$22m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Casa Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost S$613k at the EBIT level. 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. Not least because it had negative free cash flow of S$72k over the last twelve months. So suffice it to say 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, we've discovered 5 warning signs for Casa Holdings (2 can't be ignored!) that you should be aware of before investing here.

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.

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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.