Bukit Sembawang Estates (SGX:B61) 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.' 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. As with many other companies Bukit Sembawang Estates Limited (SGX:B61) makes use of debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Bukit Sembawang Estates

What Is Bukit Sembawang Estates's Debt?

As you can see below, Bukit Sembawang Estates had S$337.7m of debt at September 2020, down from S$367.3m a year prior. However, its balance sheet shows it holds S$474.6m in cash, so it actually has S$136.9m net cash.

A Look At Bukit Sembawang Estates' Liabilities

According to the last reported balance sheet, Bukit Sembawang Estates had liabilities of S$167.0m due within 12 months, and liabilities of S$350.4m due beyond 12 months. Offsetting these obligations, it had cash of S$474.6m as well as receivables valued at S$1.17b due within 12 months. So it actually has S$1.13b more liquid assets than total liabilities.

This excess liquidity is a great indication that Bukit Sembawang Estates' balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Bukit Sembawang Estates boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Bukit Sembawang Estates has increased its EBIT by 4.5% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Bukit Sembawang Estates's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Bukit Sembawang Estates 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. In the last three years, Bukit Sembawang Estates created free cash flow amounting to 12% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Bukit Sembawang Estates has net cash of S$136.9m, as well as more liquid assets than liabilities. And it also grew its EBIT by 4.5% over the last year. So we don't think Bukit Sembawang Estates'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. To that end, you should be aware of the 2 warning signs we've spotted with Bukit Sembawang Estates .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

If you decide to trade Bukit Sembawang Estates, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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