Raffles Medical Group (SGX:BSL) Could Easily Take On More Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Raffles Medical Group Ltd (SGX:BSL) does use debt in its business. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Raffles Medical Group

How Much Debt Does Raffles Medical Group Carry?

The image below, which you can click on for greater detail, shows that Raffles Medical Group had debt of S$106.1m at the end of December 2022, a reduction from S$210.4m over a year. But on the other hand it also has S$253.1m in cash, leading to a S$147.0m net cash position.

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$325.7m falling due within a year, and liabilities of S$141.6m due beyond that. On the other hand, it had cash of S$253.1m and S$194.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$20.1m.

This state of affairs indicates that Raffles Medical Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the S$2.42b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

In addition to that, we're happy to report that Raffles Medical Group has boosted its EBIT by 81%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Raffles Medical Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Over the last three years, Raffles Medical Group recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about Raffles Medical Group's liabilities, but we can be reassured by the fact it has has net cash of S$147.0m. And it impressed us with free cash flow of S$171m, being 87% of its EBIT. So we don't think Raffles Medical Group's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Raffles Medical Group is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.