Is Bukit Sembawang Estates (SGX:B61) Using Too Much 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.' 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 can see that Bukit Sembawang Estates Limited (SGX:B61) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Bukit Sembawang Estates

How Much Debt Does Bukit Sembawang Estates Carry?

As you can see below, Bukit Sembawang Estates had S$130.9m of debt at March 2022, down from S$337.9m a year prior. But on the other hand it also has S$531.3m in cash, leading to a S$400.5m net cash position.

How Healthy Is Bukit Sembawang Estates' Balance Sheet?

According to the last reported balance sheet, Bukit Sembawang Estates had liabilities of S$59.6m due within 12 months, and liabilities of S$131.8m due beyond 12 months. Offsetting these obligations, it had cash of S$531.3m as well as receivables valued at S$911.6m due within 12 months. So it actually has S$1.25b more liquid assets than total liabilities.

This surplus liquidity suggests that Bukit Sembawang Estates' 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 means the company is able to handle some adversity. Simply put, the fact that Bukit Sembawang Estates has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Bukit Sembawang Estates if management cannot prevent a repeat of the 63% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Bukit Sembawang Estates will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Happily for any shareholders, Bukit Sembawang Estates actually produced more free cash flow than EBIT over the last three years. 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 we empathize with investors who find debt concerning, the bottom line is that Bukit Sembawang Estates has net cash of S$400.5m and plenty of liquid assets. And it impressed us with free cash flow of S$100m, being 192% of its EBIT. So we don't think Bukit Sembawang Estates's use of debt is risky. 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 instance, we've identified 1 warning sign for Bukit Sembawang Estates that you should be aware of.

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. 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.