We Think Sinarmas Land (SGX:A26) Can Stay On Top Of Its Debt

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Sinarmas Land Limited (SGX:A26) does carry debt. But the real question is whether this debt is making the company risky.

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Sinarmas Land

How Much Debt Does Sinarmas Land Carry?

The image below, which you can click on for greater detail, shows that Sinarmas Land had debt of S$1.51b at the end of December 2022, a reduction from S$1.74b over a year. However, its balance sheet shows it holds S$1.60b in cash, so it actually has S$93.2m net cash.

How Strong Is Sinarmas Land's Balance Sheet?

According to the last reported balance sheet, Sinarmas Land had liabilities of S$1.20b due within 12 months, and liabilities of S$1.80b due beyond 12 months. On the other hand, it had cash of S$1.60b and S$80.1m worth of receivables due within a year. So it has liabilities totalling S$1.33b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of S$893.6m, we think shareholders really should watch Sinarmas Land's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Sinarmas Land boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Pleasingly, Sinarmas Land is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 113% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sinarmas Land will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Sinarmas Land 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 last three years, Sinarmas Land actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Sinarmas Land does have more liabilities than liquid assets, it also has net cash of S$93.2m. The cherry on top was that in converted 117% of that EBIT to free cash flow, bringing in S$689m. So we don't have any problem with Sinarmas Land's use of debt. 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 Sinarmas Land 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.