In This Article:
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies SG Fleet Group Limited (ASX:SGF) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for SG Fleet Group
What Is SG Fleet Group's Debt?
As you can see below, SG Fleet Group had AU$178.0m of debt at December 2018, down from AU$198.4m a year prior. However, it also had AU$98.0m in cash, and so its net debt is AU$79.9m.
How Strong Is SG Fleet Group's Balance Sheet?
We can see from the most recent balance sheet that SG Fleet Group had liabilities of AU$118.6m falling due within a year, and liabilities of AU$299.6m due beyond that. Offsetting this, it had AU$98.0m in cash and AU$71.6m in receivables that were due within 12 months. So its liabilities total AU$248.5m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since SG Fleet Group has a market capitalization of AU$788.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.