Does Bukit Sembawang Estates (SGX:B61) Have A Healthy Balance Sheet?

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. Importantly, Bukit Sembawang Estates Limited (SGX:B61) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View 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. But it also has S$474.6m in cash to offset that, meaning it has S$136.9m net cash.

How Healthy Is Bukit Sembawang Estates's Balance Sheet?

The latest balance sheet data shows that Bukit Sembawang Estates had liabilities of S$167.0m due within a year, and liabilities of S$350.4m falling due after that. 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 surplus liquidity suggests that Bukit Sembawang Estates's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, Bukit Sembawang Estates boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Bukit Sembawang Estates grew its EBIT by 4.5% in the last year, making that debt load look even more manageable. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Bukit Sembawang Estates 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. 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 it is always sensible to investigate a company's debt, in this case Bukit Sembawang Estates has S$136.9m in net cash and a strong balance sheet. And it also grew its EBIT by 4.5% over the last year. So is Bukit Sembawang Estates's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Bukit Sembawang Estates that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

If you’re looking to trade Bukit Sembawang Estates, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide 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@simplywallst.com.