We Think Cortina Holdings (SGX:C41) 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.' 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 Cortina Holdings Limited (SGX:C41) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Cortina Holdings

How Much Debt Does Cortina Holdings Carry?

As you can see below, Cortina Holdings had S$14.9m of debt at September 2020, down from S$15.7m a year prior. But on the other hand it also has S$122.3m in cash, leading to a S$107.4m net cash position.

How Healthy Is Cortina Holdings's Balance Sheet?

We can see from the most recent balance sheet that Cortina Holdings had liabilities of S$74.9m falling due within a year, and liabilities of S$43.3m due beyond that. On the other hand, it had cash of S$122.3m and S$20.9m worth of receivables due within a year. So it actually has S$25.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Cortina Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Cortina Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Cortina Holdings's EBIT dived 15%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But it is Cortina Holdings's earnings that will influence how the balance sheet holds up in the future. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Cortina Holdings 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. Happily for any shareholders, Cortina Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Cortina Holdings has S$107.4m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 179% of that EBIT to free cash flow, bringing in S$78m. So we don't think Cortina Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Cortina Holdings , and understanding them should be part of your investment process.

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.

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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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