Is Penguin International (SGX:BTM) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Penguin International Limited (SGX:BTM) makes use of debt. But should shareholders be worried about its use of debt?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Penguin International

How Much Debt Does Penguin International Carry?

As you can see below, at the end of December 2020, Penguin International had S$4.46m of debt, up from S$83.0k a year ago. Click the image for more detail. But it also has S$40.0m in cash to offset that, meaning it has S$35.5m net cash.

How Strong Is Penguin International's Balance Sheet?

The latest balance sheet data shows that Penguin International had liabilities of S$47.4m due within a year, and liabilities of S$15.3m falling due after that. On the other hand, it had cash of S$40.0m and S$24.5m worth of receivables due within a year. So it actually has S$1.87m more liquid assets than total liabilities.

Having regard to Penguin International's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the S$143.1m company is short on cash, but still worth keeping an eye on the balance sheet. 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 56% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Penguin International 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. While Penguin International 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. During the last three 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 it is always sensible to investigate a company's debt, in this case Penguin International has S$35.5m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Penguin International's balance sheet. 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. For example Penguin International has 3 warning signs (and 1 which can't be ignored) we think you should know about.

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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