Share Dilution

Raffles Infrastructure Holdings (SGX:LUY) Has Debt But No Earnings; Should you be worried?

Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies Raffles Infrastructure Holdings Limited (SGX:LUY) uses debt. But the real question is whether this debt makes the business risky.

What risk does debt carry?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.

See our latest analysis for Raffles Infrastructure Holdings

What is Raffles Infrastructure Holdings net debt?

As you can see below, at the end of December 2021, Raffles Infrastructure Holdings had a debt of 136.1 million Canadian yen, compared to none a year ago. Click on the image for more details. However, he has 88.4 million national yen of cash to offset this, resulting in a net debt of approximately 47.7 million national yen.

SGX:LUY Debt to Equity March 4, 2022

How strong is Raffles Infrastructure Holdings’ balance sheet?

According to the latest published balance sheet, Raffles Infrastructure Holdings had liabilities of 205.3 million Canadian yen due within 12 months and liabilities of 24.6 million domestic yen due beyond 12 months. In compensation for these obligations, it had cash of 88.4 million yen as well as receivables valued at 36.1 million yen due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of 105.4 million Canadian yen.

This deficit casts a shadow over the 19.0 million Canadian yen business, like a colossus towering above mere mortals. So we definitely think shareholders need to watch this one closely. Ultimately, Raffles Infrastructure Holdings would likely need a major recapitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of Raffles Infrastructure Holdings that will influence the balance sheet in the future. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

Last year, Raffles Infrastructure Holdings posted a loss before interest and tax and actually cut its revenue by 85%, to 31 million yen. It makes us nervous, to say the least.

Caveat Emptor

Not only has Raffles Infrastructure Holdings’ revenues fallen over the past twelve months, it has also produced negative earnings before interest and tax (EBIT). Its EBIT loss was 2.2 million Canadian yen. Combining this information with the significant liabilities we have already discussed makes us very hesitant about this stock, to say the least. That said, it is possible that the company will change course. However, we note that trailing twelve-month EBIT is worse than free cash flow of 35 million Canadian yen and earnings of 5.2 million domestic yen. So there is undoubtedly potential for the company to change things. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. For example, Raffles Infrastructure Holdings has 3 warning signs (and 2 that make us uncomfortable) that we think you should know about.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.