Does Penguin International (SGX:BTM) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Penguin International Limited (SGX:BTM) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Penguin International

How Much Debt Does Penguin International Carry?

The image below, which you can click on for greater detail, shows that at June 2020 Penguin International had debt of S$4.92m, up from S$583.0k in one year. But on the other hand it also has S$55.8m in cash, leading to a S$50.9m net cash position.

How Strong Is Penguin International's Balance Sheet?

According to the last reported balance sheet, Penguin International had liabilities of S$68.0m due within 12 months, and liabilities of S$7.94m due beyond 12 months. Offsetting this, it had S$55.8m in cash and S$29.0m in receivables that were due within 12 months. So it can boast S$8.93m more liquid assets than total liabilities.

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

In fact Penguin International's saving grace is its low debt levels, because its EBIT has tanked 54% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Penguin International'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Penguin International 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. During the last two years, Penguin International burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Penguin International has net cash of S$50.9m, as well as more liquid assets than liabilities. So while Penguin International does not have a great balance sheet, it's certainly not too bad. 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. Be aware that Penguin International is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

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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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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