These 4 Measures Indicate That Boustead Projects (SGX:AVM) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Boustead Projects Limited (SGX:AVM) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Boustead Projects

How Much Debt Does Boustead Projects Carry?

You can click the graphic below for the historical numbers, but it shows that Boustead Projects had S$59.6m of debt in September 2020, down from S$62.4m, one year before. However, its balance sheet shows it holds S$116.0m in cash, so it actually has S$56.3m net cash.

How Strong Is Boustead Projects's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Boustead Projects had liabilities of S$160.1m due within 12 months and liabilities of S$124.8m due beyond that. Offsetting this, it had S$116.0m in cash and S$91.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$77.7m.

Boustead Projects has a market capitalization of S$249.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Boustead Projects boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Boustead Projects if management cannot prevent a repeat of the 39% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Boustead Projects can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Boustead Projects may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Boustead Projects actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While Boustead Projects does have more liabilities than liquid assets, it also has net cash of S$56.3m. And it impressed us with free cash flow of S$41m, being 160% of its EBIT. So we are not troubled with Boustead Projects's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Boustead Projects .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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. 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.
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