We Think Boustead Projects (SGX:AVM) Can Stay On Top Of Its 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Boustead Projects Limited (SGX:AVM) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Boustead Projects

What Is Boustead Projects's Net Debt?

The image below, which you can click on for greater detail, shows that Boustead Projects had debt of S$59.6m at the end of September 2020, a reduction from S$62.4m over a year. However, it does have S$116.0m in cash offsetting this, leading to net cash of S$56.3m.

A Look At Boustead Projects' Liabilities

The latest balance sheet data shows that Boustead Projects had liabilities of S$160.1m due within a year, and liabilities of S$124.8m falling due after 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.

While this might seem like a lot, it is not so bad since Boustead Projects has a market capitalization of S$314.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Boustead Projects's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although Boustead Projects's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Boustead Projects you should be aware of, and 1 of them is a bit unpleasant.

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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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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