These 4 Measures Indicate That ComfortDelGro (SGX:C52) Is Using Debt Safely

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 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 is this debt a concern to shareholders?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See 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 as of June 2024 ComfortDelGro had S$677.2m of debt, an increase on S$311.9m, over one year. However, its balance sheet shows it holds S$883.7m in cash, so it actually has S$206.5m net cash.

How Healthy Is ComfortDelGro's Balance Sheet?

The latest balance sheet data shows that ComfortDelGro had liabilities of S$1.27b due within a year, and liabilities of S$808.4m falling due after that. On the other hand, it had cash of S$883.7m and S$717.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$481.8m.

Of course, ComfortDelGro has a market capitalization of S$3.29b, so these liabilities are probably manageable. 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!

On top of that, ComfortDelGro grew its EBIT by 33% over the last twelve months, and that growth will make it easier to handle its debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

Although ComfortDelGro's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of S$206.5m. The cherry on top was that in converted 89% of that EBIT to free cash flow, bringing in S$92m. So we don't think ComfortDelGro's use of debt is risky. 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 1 warning sign for ComfortDelGro that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.