ComfortDelGro (SGX:C52) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that ComfortDelGro Corporation Limited (SGX:C52) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View 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$463.7m of debt in December 2020, down from S$530.1m, one year before. However, it does have S$742.8m in cash offsetting this, leading to net cash of S$279.1m.

A Look At ComfortDelGro's Liabilities

Zooming in on the latest balance sheet data, we can see that ComfortDelGro had liabilities of S$1.04b due within 12 months and liabilities of S$1.24b due beyond that. Offsetting this, it had S$742.8m in cash and S$600.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$936.2m.

ComfortDelGro has a market capitalization of S$3.49b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, ComfortDelGro boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for ComfortDelGro if management cannot prevent a repeat of the 59% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. ComfortDelGro 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 three years, ComfortDelGro produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While ComfortDelGro does have more liabilities than liquid assets, it also has net cash of S$279.1m. The cherry on top was that in converted 72% of that EBIT to free cash flow, bringing in S$290m. So we are not troubled with ComfortDelGro's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for ComfortDelGro 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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