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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Shinvest Holding Ltd. (SGX:BJW) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Shinvest Holding
What Is Shinvest Holding's Debt?
You can click the graphic below for the historical numbers, but it shows that Shinvest Holding had S$9.62m of debt in February 2019, down from S$16.8m, one year before. Net debt is about the same, since the it doesn't have much cash.
A Look At Shinvest Holding's Liabilities
Zooming in on the latest balance sheet data, we can see that Shinvest Holding had liabilities of S$26.5m due within 12 months and liabilities of S$4.64m due beyond that. On the other hand, it had cash of S$68.0k and S$4.36m worth of receivables due within a year. So its liabilities total S$26.7m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Shinvest Holding is worth S$55.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shinvest Holding's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Shinvest Holding managed to grow its revenue by 85%, to S$64m. With any luck the company will be able to grow its way to profitability.