In This Article:
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Sin Heng Heavy Machinery Limited (SGX:BKA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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 Sin Heng Heavy Machinery
What Is Sin Heng Heavy Machinery's Net Debt?
The image below, which you can click on for greater detail, shows that Sin Heng Heavy Machinery had debt of S$10.9m at the end of June 2019, a reduction from S$54.1m over a year. But on the other hand it also has S$19.7m in cash, leading to a S$8.78m net cash position.
How Strong Is Sin Heng Heavy Machinery's Balance Sheet?
We can see from the most recent balance sheet that Sin Heng Heavy Machinery had liabilities of S$22.9m falling due within a year, and liabilities of S$15.2m due beyond that. Offsetting this, it had S$19.7m in cash and S$26.2m in receivables that were due within 12 months. So it actually has S$7.69m more liquid assets than total liabilities.
This surplus suggests that Sin Heng Heavy Machinery is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Sin Heng Heavy Machinery 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 it is Sin Heng Heavy Machinery's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Sin Heng Heavy Machinery actually shrunk its revenue by 25%, to S$78m. That makes us nervous, to say the least.