Legendary fund manager Li Lu (who Charlie Munger backed) once said, ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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 can see that Genting Singapore Limited (SGX:G13) does use debt in its business. But is this debt a concern to shareholders?
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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Genting Singapore’s Debt?
You can click the graphic below for the historical numbers, but it shows that Genting Singapore had S$255.3m of debt in September 2019, down from S$1.03b, one year before. But it also has S$3.68b in cash to offset that, meaning it has S$3.42b net cash.
How Strong Is Genting Singapore’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Genting Singapore had liabilities of S$605.4m due within 12 months and liabilities of S$535.0m due beyond that. On the other hand, it had cash of S$3.68b and S$139.3m worth of receivables due within a year. So it can boast S$2.68b more liquid assets than total liabilities.
This excess liquidity suggests that Genting Singapore is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don’t think it will have any issues with its lenders. Simply put, the fact that Genting Singapore has more cash than debt is arguably a good indication that it can manage its debt safely.
But the bad news is that Genting Singapore has seen its EBIT plunge 11% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet – far from it. For example, we’ve discovered 1 warning sign for Genting Singapore which any shareholder or potential investor should be aware of.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Genting Singapore has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Genting Singapore actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
While it is always sensible to investigate a company’s debt, in this case Genting Singapore has S$3.42b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 116% of that EBIT to free cash flow, bringing in S$891m. So is Genting Singapore’s debt a risk? It doesn’t seem so to us. We’d be very excited to see if Genting Singapore insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.