Is SIA Engineering (SGX:S59) Using Debt In A Risky Way?

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. As with many other companies SIA Engineering Company Limited (SGX:S59) makes use of debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for SIA Engineering

How Much Debt Does SIA Engineering Carry?

The image below, which you can click on for greater detail, shows that SIA Engineering had debt of S$6.76m at the end of September 2021, a reduction from S$12.7m over a year. However, its balance sheet shows it holds S$685.6m in cash, so it actually has S$678.9m net cash.

A Look At SIA Engineering's Liabilities

Zooming in on the latest balance sheet data, we can see that SIA Engineering had liabilities of S$194.3m due within 12 months and liabilities of S$70.2m due beyond that. Offsetting these obligations, it had cash of S$685.6m as well as receivables valued at S$170.9m due within 12 months. So it actually has S$592.1m 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! 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.

In the last year SIA Engineering had a loss before interest and tax, and actually shrunk its revenue by 31%, to S$484m. That makes us nervous, to say the least.

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$33m. 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. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. To that end, you should be aware of the 2 warning signs 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.