Is Boustead Singapore (SGX:F9D) A Risky Investment?

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 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. As with many other companies Boustead Singapore Limited (SGX:F9D) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Boustead Singapore

How Much Debt Does Boustead Singapore Carry?

The image below, which you can click on for greater detail, shows that Boustead Singapore had debt of S$6.97m at the end of March 2021, a reduction from S$119.0m over a year. However, its balance sheet shows it holds S$485.0m in cash, so it actually has S$478.0m net cash.

A Look At Boustead Singapore's Liabilities

We can see from the most recent balance sheet that Boustead Singapore had liabilities of S$417.3m falling due within a year, and liabilities of S$81.2m due beyond that. Offsetting this, it had S$485.0m in cash and S$292.7m in receivables that were due within 12 months. So it can boast S$279.1m more liquid assets than total liabilities.

This excess liquidity is a great indication that Boustead Singapore's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Boustead Singapore has more cash than debt is arguably a good indication that it can manage its debt safely.

While Boustead Singapore doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 Singapore'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Boustead 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, Boustead Singapore actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Boustead Singapore has S$478.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of S$61m, being 114% of its EBIT. So is Boustead Singapore's debt a risk? It doesn't seem so to us. 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 4 warning signs for Boustead Singapore you should be aware of, and 2 of them are a bit unpleasant.

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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