Yahoo Finance Health Check: How Prudently Does SNC-Lavalin Group (TSE:SNC) Use 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that SNC-Lavalin Group Inc. (TSE:SNC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for SNC-Lavalin Group
How Much Debt Does SNC-Lavalin Group Carry?
The image below, which you can click on for greater detail, shows that at June 2019 SNC-Lavalin Group had debt of CA$4.46b, up from CA$3.50b in one year. However, because it has a cash reserve of CA$886.3m, its net debt is less, at about CA$3.58b.
How Strong Is SNC-Lavalin Group's Balance Sheet?
We can see from the most recent balance sheet that SNC-Lavalin Group had liabilities of CA$6.25b falling due within a year, and liabilities of CA$4.11b due beyond that. Offsetting these obligations, it had cash of CA$886.3m as well as receivables valued at CA$3.42b due within 12 months. So its liabilities total CA$6.05b more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the CA$2.88b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, SNC-Lavalin Group would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if SNC-Lavalin Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, SNC-Lavalin Group saw its revenue drop to CA$9.8b, which is a fall of 7.0%. That's not what we would hope to see.
Caveat Emptor
Importantly, SNC-Lavalin Group had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost CA$200m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CA$858m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. For riskier companies like SNC-Lavalin Group I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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