First Resources (SGX:EB5) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, First Resources Limited (SGX:EB5) does carry 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for First Resources

What Is First Resources's Net Debt?

The image below, which you can click on for greater detail, shows that First Resources had debt of US$290.9m at the end of December 2022, a reduction from US$404.1m over a year. However, it does have US$433.8m in cash offsetting this, leading to net cash of US$142.9m.

How Strong Is First Resources' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that First Resources had liabilities of US$199.0m due within 12 months and liabilities of US$234.8m due beyond that. Offsetting this, it had US$433.8m in cash and US$87.7m in receivables that were due within 12 months. So it actually has US$87.6m more liquid assets than total liabilities.

This surplus suggests that First Resources has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that First Resources has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that First Resources has boosted its EBIT by 71%, 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 First Resources's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. First Resources 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. Over the most recent three years, First Resources recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that First Resources has net cash of US$142.9m, as well as more liquid assets than liabilities. And we liked the look of last year's 71% year-on-year EBIT growth. So we don't think First Resources's use of debt is risky. 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 learn about the 2 warning signs we've spotted with First Resources (including 1 which shouldn't be ignored) .

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.

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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.