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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 note that First Ship Lease Trust (SGX:D8DU) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for First Ship Lease Trust

What Is First Ship Lease Trust's Debt?

The image below, which you can click on for greater detail, shows that First Ship Lease Trust had debt of US$5.12m at the end of December 2024, a reduction from US$10.1m over a year. However, it does have US$14.8m in cash offsetting this, leading to net cash of US$9.67m.

A Look At First Ship Lease Trust's Liabilities

According to the last reported balance sheet, First Ship Lease Trust had liabilities of US$3.46m due within 12 months, and liabilities of US$2.65m due beyond 12 months. On the other hand, it had cash of US$14.8m and US$1.18m worth of receivables due within a year. So it actually has US$9.86m more liquid assets than total liabilities.

It's good to see that First Ship Lease Trust has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, First Ship Lease Trust boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly First Ship Lease Trust's EBIT was essentially flat over the last twelve months. Ideally it can diminish its debt load by kick-starting earnings growth. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case First Ship Lease Trust has US$9.67m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 556% of that EBIT to free cash flow, bringing in US$7.3m. So we don't think First Ship Lease Trust's use of debt is risky. 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. We've identified 3 warning signs with First Ship Lease Trust (at least 1 which is significant) , and understanding them should be part of your investment process.

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. 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.