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

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 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 Dangerous?

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. 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. 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.

Check out our latest analysis for SIA Engineering

What Is SIA Engineering's Net Debt?

As you can see below, SIA Engineering had S$2.49m of debt at March 2023, down from S$2.80m a year prior. But it also has S$633.0m in cash to offset that, meaning it has S$630.5m 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$215.5m due within 12 months and liabilities of S$91.1m due beyond that. Offsetting this, it had S$633.0m in cash and S$262.5m in receivables that were due within 12 months. So it actually has S$588.9m more liquid assets than total liabilities.

It's good to see that SIA Engineering has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any 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 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 41%, to S$796m. Shareholders probably have their fingers crossed that it can grow its way to profits.

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$66m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Keeping in mind its 41% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for SIA Engineering you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.