Is Bukit Sembawang Estates (SGX:B61) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Bukit Sembawang Estates Limited (SGX:B61) does have debt on its balance sheet. 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. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for Bukit Sembawang Estates

How Much Debt Does Bukit Sembawang Estates Carry?

The chart below, which you can click on for greater detail, shows that Bukit Sembawang Estates had S$337.9m in debt in March 2021; about the same as the year before. But it also has S$729.7m in cash to offset that, meaning it has S$391.9m net cash.

How Healthy Is Bukit Sembawang Estates' Balance Sheet?

We can see from the most recent balance sheet that Bukit Sembawang Estates had liabilities of S$119.8m falling due within a year, and liabilities of S$347.1m due beyond that. Offsetting this, it had S$729.7m in cash and S$995.9m in receivables that were due within 12 months. So it can boast S$1.26b 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. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Bukit Sembawang Estates boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Bukit Sembawang Estates has boosted its EBIT by 47%, thus reducing the spectre of future debt repayments. 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 Bukit Sembawang Estates 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.

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. Over the most recent three years, Bukit Sembawang Estates recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

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$391.9m, as well as more liquid assets than liabilities. And we liked the look of last year's 47% year-on-year EBIT growth. At the end of the day we're not concerned about Bukit Sembawang Estates's debt. 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. For example, we've discovered 2 warning signs for Bukit Sembawang Estates (1 shouldn't be ignored!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.
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