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- SGX:CJLU
Does NetLink NBN Trust (SGX:CJLU) Have A Healthy Balance Sheet?
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. We can see that NetLink NBN Trust (SGX:CJLU) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for NetLink NBN Trust
What Is NetLink NBN Trust's Net Debt?
As you can see below, NetLink NBN Trust had S$664.7m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has S$170.5m in cash leading to net debt of about S$494.2m.
A Look At NetLink NBN Trust's Liabilities
We can see from the most recent balance sheet that NetLink NBN Trust had liabilities of S$614.8m falling due within a year, and liabilities of S$705.0m due beyond that. On the other hand, it had cash of S$170.5m and S$70.7m worth of receivables due within a year. So its liabilities total S$1.08b more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since NetLink NBN Trust has a market capitalization of S$3.72b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
NetLink NBN Trust has net debt worth 1.8 times EBITDA, which isn't too much, but its interest cover looks a bit on the low side, with EBIT at only 5.8 times the interest expense. In large part that's due to the company's significant depreciation and amortisation charges, which arguably mean its EBITDA is a very generous measure of earnings, and its debt may be more of a burden than it first appears. Importantly NetLink NBN Trust's EBIT was essentially flat over the last twelve months. Ideally it can diminish its debt load by kick-starting earnings growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if NetLink NBN Trust 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, NetLink NBN Trust actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Our View
NetLink NBN Trust's conversion of EBIT to free cash flow suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And its interest cover is good too. All these things considered, it appears that NetLink NBN Trust can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. 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. For example - NetLink NBN Trust has 1 warning sign we think you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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About SGX:CJLU
NetLink NBN Trust
Owns, designs, builds, and operates the passive fibre network infrastructure for residential homes and non-residential premises, and non-building address point (NBAP) connections in mainland Singapore and its connected islands.
Adequate balance sheet and slightly overvalued.