Food Empire Holdings (SGX:F03) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Food Empire Holdings Limited (SGX:F03) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Food Empire Holdings

What Is Food Empire Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Food Empire Holdings had US$53.7m of debt, an increase on US$50.0m, over one year. However, it does have US$69.0m in cash offsetting this, leading to net cash of US$15.3m.

How Healthy Is Food Empire Holdings' Balance Sheet?

The latest balance sheet data shows that Food Empire Holdings had liabilities of US$55.0m due within a year, and liabilities of US$40.7m falling due after that. Offsetting this, it had US$69.0m in cash and US$34.0m in receivables that were due within 12 months. So it can boast US$7.40m more liquid assets than total liabilities.

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

Also good is that Food Empire Holdings grew its EBIT at 11% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Food Empire Holdings'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Food Empire Holdings 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, Food Empire Holdings recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Food Empire Holdings has net cash of US$15.3m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 11% in the last twelve months. So we are not troubled with Food Empire Holdings's debt use. 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 2 warning signs we've spotted with Food Empire Holdings .

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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This article by Simply Wall St is general in nature. 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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