Would Singapore Myanmar Investco (SGX:Y45) Be Better Off With Less Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘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 can see that Singapore Myanmar Investco Limited (SGX:Y45) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?
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. 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.

Check out our latest analysis for Singapore Myanmar Investco

What Is Singapore Myanmar Investco’s Net Debt?
The image below, which you can click on for greater detail, shows that Singapore Myanmar Investco had debt of US$12.3m at the end of September 2019, a reduction from US$17.1m over a year. However, because it has a cash reserve of US$1.95m, its net debt is less, at about US$10.4m.

SGX:Y45 Historical Debt June 9th 2020
SGX:Y45 Historical Debt June 9th 2020
How Strong Is Singapore Myanmar Investco’s Balance Sheet?
According to the last reported balance sheet, Singapore Myanmar Investco had liabilities of US$23.1m due within 12 months, and liabilities of US$2.35m due beyond 12 months. Offsetting this, it had US$1.95m in cash and US$30.7m in receivables that were due within 12 months. So it can boast US$7.20m more liquid assets than total liabilities.

This surplus strongly suggests that Singapore Myanmar Investco has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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 Singapore Myanmar Investco will need earnings to service that debt. 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.

Over 12 months, Singapore Myanmar Investco made a loss at the EBIT level, and saw its revenue drop to US$23m, which is a fall of 7.2%. That’s not what we would hope to see.

Caveat Emptor
Over the last twelve months Singapore Myanmar Investco produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$2.6m at the EBIT level. That said, we’re impressed with the strong balance sheet liquidity. That should give the business time to grow its cashflow. The company is risky because it will grow into the future to get to profitability and free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example – Singapore Myanmar Investco has 4 warning signs (and 3 which can’t be ignored) we think you should know about.

If you’re interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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. Thank you for reading.

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Source : Simply Wall

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