Is Singularity Future Technology (NASDAQ:SGLY) Using Debt Sensibly?

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.' 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. We note that Singularity Future Technology Ltd. (NASDAQ:SGLY) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Singularity Future Technology

What Is Singularity Future Technology's Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Singularity Future Technology had debt of US$10.0m, up from US$280.5k in one year. However, it does have US$51.4m in cash offsetting this, leading to net cash of US$41.4m.

A Look At Singularity Future Technology's Liabilities

The latest balance sheet data shows that Singularity Future Technology had liabilities of US$5.41m due within a year, and liabilities of US$11.0m falling due after that. Offsetting this, it had US$51.4m in cash and US$66.0k in receivables that were due within 12 months. So it can boast US$35.0m more liquid assets than total liabilities.

It's good to see that Singularity Future Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Singularity Future Technology 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 you can't view debt in total isolation; since Singularity Future Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Singularity Future Technology had a loss before interest and tax, and actually shrunk its revenue by 14%, to US$5.0m. That's not what we would hope to see.

So How Risky Is Singularity Future Technology?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Singularity Future Technology had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$8.6m of cash and made a loss of US$17m. Given it only has net cash of US$41.4m, 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Singularity Future Technology (at least 2 which are a bit unpleasant) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.