We Think SMI Vantage (SGX:Y45) Has A Fair Chunk Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that SMI Vantage Limited (SGX:Y45) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, 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.

See our latest analysis for SMI Vantage

What Is SMI Vantage's Debt?

The image below, which you can click on for greater detail, shows that SMI Vantage had debt of US$9.07m at the end of March 2023, a reduction from US$10.6m over a year. However, it does have US$750.0k in cash offsetting this, leading to net debt of about US$8.32m.

A Look At SMI Vantage's Liabilities

According to the last reported balance sheet, SMI Vantage had liabilities of US$5.50m due within 12 months, and liabilities of US$9.51m due beyond 12 months. Offsetting this, it had US$750.0k in cash and US$4.38m in receivables that were due within 12 months. So it has liabilities totalling US$9.88m more than its cash and near-term receivables, combined.

SMI Vantage has a market capitalization of US$18.4m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since SMI Vantage 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.

While it hasn't made a profit, at least SMI Vantage booked its first revenue as a publicly listed company, in the last twelve months.

Caveat Emptor

Over the last twelve months SMI Vantage produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$2.7m. 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. However, it doesn't help that it burned through US$933k of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 6 warning signs for SMI Vantage you should be aware of, and 3 of them are a bit unpleasant.

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. 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.