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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 OKH Global Ltd. (SGX:S3N) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for OKH Global
How Much Debt Does OKH Global Carry?
You can click the graphic below for the historical numbers, but it shows that OKH Global had S$160.2m of debt in March 2019, down from S$171.7m, one year before. However, because it has a cash reserve of S$6.39m, its net debt is less, at about S$153.8m.
How Strong Is OKH Global's Balance Sheet?
According to the last reported balance sheet, OKH Global had liabilities of S$76.4m due within 12 months, and liabilities of S$103.2m due beyond 12 months. On the other hand, it had cash of S$6.39m and S$16.7m worth of receivables due within a year. So it has liabilities totalling S$156.5m more than its cash and near-term receivables, combined.
This deficit casts a shadow over the S$21.4m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt At the end of the day, OKH Global would probably need a major re-capitalization if its creditors were to demand repayment.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).