SUTL Enterprise (SGX:BHU) Takes On Some Risk With Its Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that SUTL Enterprise Limited (SGX:BHU) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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

How Much Debt Does SUTL Enterprise Carry?

As you can see below, at the end of June 2020, SUTL Enterprise had S$3.95m of debt, up from S$665.0k a year ago. Click the image for more detail. However, its balance sheet shows it holds S$48.3m in cash, so it actually has S$44.4m net cash.

How Healthy Is SUTL Enterprise's Balance Sheet?

According to the last reported balance sheet, SUTL Enterprise had liabilities of S$12.8m due within 12 months, and liabilities of S$55.7m due beyond 12 months. Offsetting this, it had S$48.3m in cash and S$3.19m in receivables that were due within 12 months. So its liabilities total S$16.9m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because SUTL Enterprise is worth S$42.8m, and thus could probably raise enough capital to shore up 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. While it does have liabilities worth noting, SUTL Enterprise also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for SUTL Enterprise if management cannot prevent a repeat of the 68% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. SUTL Enterprise 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. Looking at the most recent three years, SUTL Enterprise recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While SUTL Enterprise does have more liabilities than liquid assets, it also has net cash of S$44.4m. So although we see some areas for improvement, we're not too worried about SUTL Enterprise's balance sheet. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with SUTL Enterprise , and understanding them should be part of your investment process.

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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