ComfortDelGro (SGX:C52) Could Easily Take On More 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies ComfortDelGro Corporation Limited (SGX:C52) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 ComfortDelGro

How Much Debt Does ComfortDelGro Carry?

You can click the graphic below for the historical numbers, but it shows that ComfortDelGro had S$292.2m of debt in December 2022, down from S$341.0m, one year before. But it also has S$967.0m in cash to offset that, meaning it has S$674.8m net cash.

How Strong Is ComfortDelGro's Balance Sheet?

We can see from the most recent balance sheet that ComfortDelGro had liabilities of S$1.04b falling due within a year, and liabilities of S$660.6m due beyond that. Offsetting this, it had S$967.0m in cash and S$550.0m in receivables that were due within 12 months. So its liabilities total S$184.4m more than the combination of its cash and short-term receivables.

Given ComfortDelGro has a market capitalization of S$2.51b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, ComfortDelGro boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that ComfortDelGro has increased its EBIT by 4.6% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if ComfortDelGro can strengthen its balance sheet over time. 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. While ComfortDelGro 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, ComfortDelGro actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about ComfortDelGro's liabilities, but we can be reassured by the fact it has has net cash of S$674.8m. The cherry on top was that in converted 208% of that EBIT to free cash flow, bringing in S$298m. So we don't think ComfortDelGro'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. Be aware that ComfortDelGro is showing 1 warning sign in our investment analysis , you should know about...

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. 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.