We Think Raffles Medical Group (SGX:BSL) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Raffles Medical Group Ltd (SGX:BSL) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. 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.

View 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 at December 2021 Raffles Medical Group had debt of S$210.4m, up from S$199.0m in one year. However, its balance sheet shows it holds S$265.0m in cash, so it actually has S$54.6m net cash.

How Strong Is Raffles Medical Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Raffles Medical Group had liabilities of S$416.6m due within 12 months and liabilities of S$152.1m due beyond that. Offsetting this, it had S$265.0m in cash and S$160.7m in receivables that were due within 12 months. So its liabilities total S$142.9m more than the combination of its cash and short-term receivables.

Since publicly traded Raffles Medical Group shares are worth a total of S$2.25b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 66% 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, a company can only pay off debt with cold hard cash, not accounting profits. Raffles Medical Group 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. During the last three years, Raffles Medical Group produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

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$54.6m in net cash. And it impressed us with its EBIT growth of 66% over the last year. So we don't think Raffles Medical Group's use of debt is risky. We'd be very excited to see if Raffles Medical Group insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.

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.