First Ship Lease Trust (SGX:D8DU) Has A Rock Solid Balance Sheet

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. We can see that First Ship Lease Trust (SGX:D8DU) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

View our latest analysis for First Ship Lease Trust

What Is First Ship Lease Trust's Net Debt?

The image below, which you can click on for greater detail, shows that First Ship Lease Trust had debt of US$31.7m at the end of September 2020, a reduction from US$76.7m over a year. But it also has US$41.2m in cash to offset that, meaning it has US$9.50m net cash.

How Strong Is First Ship Lease Trust's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that First Ship Lease Trust had liabilities of US$19.5m due within 12 months and liabilities of US$14.5m due beyond that. Offsetting this, it had US$41.2m in cash and US$5.15m in receivables that were due within 12 months. So it actually has US$12.3m more liquid assets than total liabilities.

This short term liquidity is a sign that First Ship Lease Trust could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, First Ship Lease Trust boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that First Ship Lease Trust has boosted its EBIT by 43%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since First Ship Lease Trust will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While First Ship Lease Trust 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, First Ship Lease Trust 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

While we empathize with investors who find debt concerning, you should keep in mind that First Ship Lease Trust has net cash of US$9.50m, as well as more liquid assets than liabilities. The cherry on top was that in converted 419% of that EBIT to free cash flow, bringing in US$93m. So we don't think First Ship Lease Trust's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for First Ship Lease Trust that you should be aware of.

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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