Health Check: How Prudently Does SIA Engineering (SGX:S59) Use 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.' 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. Importantly, SIA Engineering Company Limited (SGX:S59) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for SIA Engineering

What Is SIA Engineering's Net Debt?

As you can see below, at the end of September 2021, SIA Engineering had S$85.5m of debt, up from S$9.92m a year ago. Click the image for more detail. But on the other hand it also has S$685.6m in cash, leading to a S$600.2m net cash position.

A Look At SIA Engineering's Liabilities

According to the last reported balance sheet, SIA Engineering had liabilities of S$194.3m due within 12 months, and liabilities of S$70.2m due beyond 12 months. On the other hand, it had cash of S$685.6m and S$170.9m worth of receivables due within a year. So it can boast S$592.1m more liquid assets than total liabilities.

This excess liquidity suggests that SIA Engineering is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that SIA Engineering has more cash than debt is arguably a good indication that it can manage its debt safely. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, SIA Engineering made a loss at the EBIT level, and saw its revenue drop to S$519m, which is a fall of 6.8%. We would much prefer see growth.

So How Risky Is SIA Engineering?

Although SIA Engineering had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of S$58m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. To that end, you should be aware of the 1 warning sign we've spotted with SIA Engineering .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.