Is Genting Singapore (SGX:G13) Using Too Much Debt?

Warren Buffett famously said, '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. We note that Genting Singapore Limited (SGX:G13) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Genting Singapore

What Is Genting Singapore's Debt?

As you can see below, Genting Singapore had S$256.0m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has S$3.99b in cash to offset that, meaning it has S$3.74b net cash.

A Look At Genting Singapore's Liabilities

According to the last reported balance sheet, Genting Singapore had liabilities of S$463.2m due within 12 months, and liabilities of S$488.7m due beyond 12 months. Offsetting these obligations, it had cash of S$3.99b as well as receivables valued at S$56.1m due within 12 months. So it actually has S$3.10b more liquid assets than total liabilities.

This surplus strongly suggests that Genting Singapore has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Genting Singapore boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Genting Singapore's load is not too heavy, because its EBIT was down 89% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Genting 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Genting 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, Genting Singapore actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Genting Singapore has S$3.74b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 114% of that EBIT to free cash flow, bringing in S$154m. So is Genting 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. To that end, you should be aware of the 1 warning sign we've spotted with Genting Singapore .

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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