Does SEVAK (SGX:BAI) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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. As with many other companies SEVAK Limited (SGX:BAI) makes use of debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. 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 SEVAK

How Much Debt Does SEVAK Carry?

You can click the graphic below for the historical numbers, but it shows that SEVAK had S$2.21m of debt in December 2020, down from S$2.49m, one year before. However, its balance sheet shows it holds S$13.4m in cash, so it actually has S$11.2m net cash.

How Healthy Is SEVAK's Balance Sheet?

We can see from the most recent balance sheet that SEVAK had liabilities of S$15.5m falling due within a year, and liabilities of S$3.43m due beyond that. On the other hand, it had cash of S$13.4m and S$13.6m worth of receivables due within a year. So it can boast S$8.03m more liquid assets than total liabilities.

This luscious liquidity implies that SEVAK's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that SEVAK has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is SEVAK's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year SEVAK had a loss before interest and tax, and actually shrunk its revenue by 9.2%, to S$264m. That's not what we would hope to see.

So How Risky Is SEVAK?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year SEVAK had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through S$3.6m of cash and made a loss of S$2.8m. Given it only has net cash of S$11.2m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 instance, we've identified 2 warning signs for SEVAK (1 doesn't sit too well with us) you should be aware of.

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. 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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