SUTL Enterprise (SGX:BHU) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, SUTL Enterprise Limited (SGX:BHU) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for SUTL Enterprise

What Is SUTL Enterprise's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 SUTL Enterprise had S$5.67m of debt, an increase on S$4.07m, over one year. However, it does have S$48.6m in cash offsetting this, leading to net cash of S$43.0m.

A Look At SUTL Enterprise's Liabilities

We can see from the most recent balance sheet that SUTL Enterprise had liabilities of S$14.8m falling due within a year, and liabilities of S$53.5m due beyond that. Offsetting this, it had S$48.6m in cash and S$2.68m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$17.0m.

This deficit isn't so bad because SUTL Enterprise is worth S$51.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, SUTL Enterprise boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, SUTL Enterprise grew its EBIT by 161% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 28% 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$43.0m. And it impressed us with its EBIT growth of 161% over the last year. So we don't have any problem with SUTL Enterprise's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for SUTL Enterprise (1 makes us a bit uncomfortable) you should be aware of.

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.
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