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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Southern Archipelago Ltd. (SGX:A33) does use debt in its business. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Southern Archipelago's Debt?

As you can see below, at the end of June 2025, Southern Archipelago had S$8.30m of debt, up from S$5.45m a year ago. Click the image for more detail. On the flip side, it has S$443.0k in cash leading to net debt of about S$7.85m.

How Healthy Is Southern Archipelago's Balance Sheet?

We can see from the most recent balance sheet that Southern Archipelago had liabilities of S$5.59m falling due within a year, and liabilities of S$4.36m due beyond that. Offsetting this, it had S$443.0k in cash and S$859.0k in receivables that were due within 12 months. So its liabilities total S$8.65m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Southern Archipelago has a market capitalization of S$27.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Southern Archipelago will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Check out our latest analysis for Southern Archipelago

Over 12 months, Southern Archipelago made a loss at the EBIT level, and saw its revenue drop to S$4.3m, which is a fall of 12%. That's not what we would hope to see.

Caveat Emptor

While Southern Archipelago's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at S$218k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled S$3.8m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Southern Archipelago (of which 1 doesn't sit too well with us!) you should know about.

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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.