Is Pavillon Holdings (SGX: 596) a risky investment?


David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We can see that Pavilion Holdings Ltd. (SGX: 596) uses debt in its business. But the most important question is: what risk does this debt create?

What risk does debt entail?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance their growth without negative consequences. When we think of a business’s use of debt, we first look at cash flow and debt together.

Check out our latest analysis for Pavillon Holdings

What is Pavillon Holdings’ net debt?

You can click on the graph below for the historical figures, but it shows that as of June 2021, Pavilion Holdings had a debt of S $ 3.75 million, an increase from S $ 1.90 million. , over one year. However, he has S $ 7.26 million offsetting this, which leads to a net cash position of S $ 3.51 million.

SGX: 596 Debt to equity history August 23, 2021

How strong is Pavillon Holdings’ balance sheet?

The latest balance sheet data shows that Pavillon Holdings had liabilities of S $ 4.45 million due within one year, and S $ 2.27 million of liabilities due thereafter. In return, he had S $ 7.26 million in cash and S $ 398.0,000 in receivables due within 12 months. He can therefore boast of having S $ 928.0 000 more in liquid assets than total Liabilities.

This surplus suggests that Pavillon Holdings has a prudent balance sheet and could probably eliminate its debt without too much difficulty. Put simply, the fact that Pavillon Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in isolation; since Pavillon Holdings will need income to repay this debt. So if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.

In the past year, Pavillon Holdings recorded a loss before interest and taxes and actually reduced its revenue by 6.1% to S $ 9.3 million. We would much prefer to see the growth.

So how risky is Pavillon Holdings?

We are convinced that loss-making companies are, in general, riskier than profitable companies. And over the past year, Pavillon Holdings has recorded a loss of earnings before interest and taxes (EBIT), frankly. Indeed, during this period, he spent S $ 337,000 and recorded a loss of S $ 5.9 million. With only S $ 3.51 million on the balance sheet, it looks like it will soon have to raise capital again. Overall, its balance sheet doesn’t look too risky at the moment, but we are still cautious until we see positive free cash flow. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. To this end, you should inquire about the 3 warning signs we identified with Pavillon Holdings (including 2 which are significant).

At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.

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