These 4 Measures Indicate That First Ship Lease Trust (SGX:D8DU) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies First Ship Lease Trust (SGX:D8DU) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for First Ship Lease Trust

What Is First Ship Lease Trust's Debt?

You can click the graphic below for the historical numbers, but it shows that First Ship Lease Trust had US$11.8m of debt in June 2023, down from US$15.2m, one year before. However, its balance sheet shows it holds US$31.5m in cash, so it actually has US$19.7m 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$4.24m due within 12 months and liabilities of US$8.39m due beyond that. On the other hand, it had cash of US$31.5m and US$1.24m worth of receivables due within a year. So it actually has US$20.1m more liquid assets than total liabilities.

This luscious liquidity implies that First Ship Lease Trust's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, First Ship Lease Trust boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that First Ship Lease Trust grew its EBIT by 1,716% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. 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. Over the last three years, First Ship Lease Trust actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case First Ship Lease Trust has US$19.7m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$39m, being 1,388% of its EBIT. The bottom line is that we do not find First Ship Lease Trust's debt levels at all concerning. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for First Ship Lease Trust you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.