These 4 Measures Indicate That Genting Singapore (SGX:G13) Is Using Debt Safely

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.' 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. As with many other companies Genting Singapore Limited (SGX:G13) makes use of debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Genting Singapore

What Is Genting Singapore's Net Debt?

As you can see below, Genting Singapore had S$241.7m of debt at June 2021, down from S$259.0m a year prior. However, its balance sheet shows it holds S$3.19b in cash, so it actually has S$2.95b net cash.

How Strong Is Genting Singapore's Balance Sheet?

We can see from the most recent balance sheet that Genting Singapore had liabilities of S$423.8m falling due within a year, and liabilities of S$472.4m due beyond that. Offsetting this, it had S$3.19b in cash and S$49.2m in receivables that were due within 12 months. So it actually has S$2.35b more liquid assets than total liabilities.

This surplus suggests that Genting Singapore is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Genting Singapore boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Genting Singapore has boosted its EBIT by 52%, thus reducing the spectre of future debt repayments. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. Over the most recent three years, Genting Singapore recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Genting Singapore has net cash of S$2.95b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 52% over the last year. So is Genting Singapore's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Genting Singapore, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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