Is ComfortDelGro (SGX:C52) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that ComfortDelGro Corporation Limited (SGX:C52) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for ComfortDelGro

What Is ComfortDelGro's Debt?

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, its balance sheet shows it holds S$742.8m in cash, so it actually has S$279.1m net cash.

A Look At ComfortDelGro's Liabilities

According to the last reported balance sheet, ComfortDelGro had liabilities of S$1.04b due within 12 months, and liabilities of S$1.24b due beyond 12 months. 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.

While this might seem like a lot, it is not so bad since ComfortDelGro has a market capitalization of S$3.64b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, ComfortDelGro also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for ComfortDelGro if management cannot prevent a repeat of the 86% 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. During the last three years, ComfortDelGro generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While ComfortDelGro does have more liabilities than liquid assets, it also has net cash of S$279.1m. And it impressed us with free cash flow of S$290m, being 81% of its EBIT. So we are not troubled with ComfortDelGro's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for ComfortDelGro that you should be aware of before investing here.

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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