Does SIA Engineering (SGX:S59) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies SIA Engineering Company Limited (SGX:S59) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for SIA Engineering

What Is SIA Engineering's Net Debt?

The image below, which you can click on for greater detail, shows that SIA Engineering had debt of S$110.4m at the end of March 2024, a reduction from S$115.2m over a year. However, its balance sheet shows it holds S$646.0m in cash, so it actually has S$535.5m net cash.

How Healthy Is SIA Engineering's Balance Sheet?

We can see from the most recent balance sheet that SIA Engineering had liabilities of S$301.9m falling due within a year, and liabilities of S$83.2m due beyond that. Offsetting this, it had S$646.0m in cash and S$287.3m in receivables that were due within 12 months. So it actually has S$548.2m more liquid assets than total liabilities.

This excess liquidity suggests that SIA Engineering is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, SIA Engineering boasts net cash, so it's fair to say it does not have a heavy debt load!

Although SIA Engineering made a loss at the EBIT level, last year, it was also good to see that it generated S$2.4m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if SIA Engineering can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. SIA Engineering may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, SIA Engineering actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case SIA Engineering has S$535.5m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 2,184% of that EBIT to free cash flow, bringing in S$52m. So we don't think SIA Engineering's use of debt is 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. Case in point: We've spotted 1 warning sign for SIA Engineering 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. 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.