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Warren Buffett said: “Volatility is far from synonymous with risk”. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Mostly, SNC-Lavalin Group Inc. (TSE: SNC) is in debt. But the most important question is: what risk does this debt create?
When is debt a problem?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Consult our latest analysis for the SNC-Lavalin Group
What is the debt of the SNC-Lavalin Group?
The image below, which you can click for more details, shows that SNC-Lavalin Group had C $ 1.83 billion in debt at the end of June 2021, a reduction from 2.49 billion $ CA over one year. However, given that it has a cash reserve of C $ 879.1 million, its net debt is less, at approximately C $ 949.3 million.
How healthy is the SNC-Lavalin Group’s balance sheet?
The latest balance sheet data shows that the SNC-Lavalin Group had a liability of CA $ 3.89 billion due within one year, and a liability of CA $ 3.21 billion due thereafter. On the other hand, it had C $ 879.1 million in cash and C $ 2.18 billion in receivables due within one year. Its liabilities therefore total C $ 4.04 billion more than the combination of its cash and short-term receivables.
This deficit is considerable compared to its market capitalization of C $ 5.99 billion, so he suggests that shareholders keep an eye on the use of debt by SNC-Lavalin Group. If its lenders asked it to consolidate the balance sheet, shareholders would likely face serious dilution. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine SNC-Lavalin Group’s ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Over the past year, the SNC-Lavalin Group has not been profitable at the EBIT level, but has managed to increase its revenues by 9.0%, to C $ 7.1 billion. We generally like to see unprofitable businesses growing faster, but each in their own way.
Emptor Warning
Over the past twelve months, the SNC-Lavalin Group has achieved earnings before interest and taxes (EBIT). Indeed, it lost 21 million Canadian dollars at the EBIT level. Considering that besides the liabilities mentioned above, we are not convinced that the company should use so much debt. We therefore believe that its record is a bit strained, but not irreparable. Another reason to be cautious is that C $ 17 million is lost in negative free cash flow in the last twelve months. Suffice it to say that we consider the action risky. 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. For example, we have identified 1 warning sign for SNC-Lavalin Group that you need to be aware of.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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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 any of the stocks mentioned.
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