Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Low Keng Huat (Singapore) Limited (SGX:F1E) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Low Keng Huat (Singapore)

What Is Low Keng Huat (Singapore)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of April 2019 Low Keng Huat (Singapore) had S$445.4m of debt, an increase on S$401.3m, over one year. However, it also had S$116.4m in cash, and so its net debt is S$329.0m.

How Strong Is Low Keng Huat (Singapore)'s Balance Sheet?

The latest balance sheet data shows that Low Keng Huat (Singapore) had liabilities of S$135.9m due within a year, and liabilities of S$385.8m falling due after that. Offsetting this, it had S$116.4m in cash and S$63.8m in receivables that were due within 12 months. So its liabilities total S$341.5m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of S$362.0m, so it does suggest shareholders should keep an eye on Low Keng Huat (Singapore)'s use of debt. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.