Is Raffles Medical Group (SGX:BSL) A Risky Investment?

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.' 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. We note that Raffles Medical Group Ltd (SGX:BSL) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Raffles Medical Group

What Is Raffles Medical Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Raffles Medical Group had S$154.3m of debt in June 2022, down from S$182.4m, one year before. But it also has S$289.1m in cash to offset that, meaning it has S$134.7m net cash.

How Healthy Is Raffles Medical Group's Balance Sheet?

We can see from the most recent balance sheet that Raffles Medical Group had liabilities of S$404.3m falling due within a year, and liabilities of S$152.8m due beyond that. Offsetting these obligations, it had cash of S$289.1m as well as receivables valued at S$130.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$137.3m.

Of course, Raffles Medical Group has a market capitalization of S$2.46b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Raffles Medical Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Raffles Medical Group grew its EBIT by 44% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Raffles Medical Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Raffles Medical Group 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, Raffles Medical Group actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Raffles Medical Group has S$134.7m in net cash. And it impressed us with free cash flow of S$188m, being 102% of its EBIT. So we don't think Raffles Medical Group's use of debt is risky. 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. Case in point: We've spotted 1 warning sign for Raffles Medical Group you should be aware of.

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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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.