Here's Why SUTL Enterprise (SGX:BHU) Has A Meaningful Debt Burden

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.' 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. We can see that SUTL Enterprise Limited (SGX:BHU) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for SUTL Enterprise

What Is SUTL Enterprise's Debt?

As you can see below, at the end of December 2020, SUTL Enterprise had S$5.57m of debt, up from S$4.00m a year ago. Click the image for more detail. But on the other hand it also has S$50.4m in cash, leading to a S$44.8m net cash position.

A Look At SUTL Enterprise's Liabilities

Zooming in on the latest balance sheet data, we can see that SUTL Enterprise had liabilities of S$17.5m due within 12 months and liabilities of S$55.2m due beyond that. Offsetting these obligations, it had cash of S$50.4m as well as receivables valued at S$2.83m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$19.6m.

SUTL Enterprise has a market capitalization of S$41.1m, 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, SUTL Enterprise boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, SUTL Enterprise's EBIT fell a jaw-dropping 22% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since SUTL Enterprise will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While SUTL Enterprise 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. In the last three years, SUTL Enterprise's free cash flow amounted to 46% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

Although SUTL Enterprise'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$44.8m. So while SUTL Enterprise does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example SUTL Enterprise has 4 warning signs (and 1 which is concerning) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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