Stock Analysis

Jardine Cycle & Carriage (SGX:C07) Has A Rock Solid Balance Sheet

SGX:C07
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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 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. Importantly, Jardine Cycle & Carriage Limited (SGX:C07) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Jardine Cycle & Carriage

What Is Jardine Cycle & Carriage's Net Debt?

As you can see below, Jardine Cycle & Carriage had US$6.24b of debt at June 2022, down from US$6.90b a year prior. On the flip side, it has US$4.08b in cash leading to net debt of about US$2.16b.

debt-equity-history-analysis
SGX:C07 Debt to Equity History October 4th 2022

How Strong Is Jardine Cycle & Carriage's Balance Sheet?

According to the last reported balance sheet, Jardine Cycle & Carriage had liabilities of US$8.04b due within 12 months, and liabilities of US$4.81b due beyond 12 months. Offsetting this, it had US$4.08b in cash and US$5.63b in receivables that were due within 12 months. So it has liabilities totalling US$3.13b more than its cash and near-term receivables, combined.

Jardine Cycle & Carriage has a market capitalization of US$9.45b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Jardine Cycle & Carriage has a low net debt to EBITDA ratio of only 0.63. And its EBIT easily covers its interest expense, being 184 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Better yet, Jardine Cycle & Carriage grew its EBIT by 109% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Jardine Cycle & Carriage's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Jardine Cycle & Carriage actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

Happily, Jardine Cycle & Carriage's impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! Considering this range of factors, it seems to us that Jardine Cycle & Carriage is quite prudent with its debt, and the risks seem well managed. So we're not worried about the use of a little leverage on the balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. 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 1 warning sign for Jardine Cycle & Carriage you should know about.

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.

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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.

About SGX:C07

Jardine Cycle & Carriage

An investment holding company, engages in the financial services, heavy equipment, mining, construction and energy, agribusiness, infrastructure and logistics, information technology, and property businesses in Indonesia and internationally.

Flawless balance sheet, undervalued and pays a dividend.