Is Singapore Post (SGX:S08) Using Too Much Debt?

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. We can see that Singapore Post Limited (SGX:S08) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Singapore Post

What Is Singapore Post's Net Debt?

The image below, which you can click on for greater detail, shows that Singapore Post had debt of S$263.6m at the end of September 2020, a reduction from S$286.1m over a year. However, it does have S$458.7m in cash offsetting this, leading to net cash of S$195.1m.

A Look At Singapore Post's Liabilities

According to the last reported balance sheet, Singapore Post had liabilities of S$656.4m due within 12 months, and liabilities of S$348.6m due beyond 12 months. Offsetting these obligations, it had cash of S$458.7m as well as receivables valued at S$206.8m due within 12 months. So it has liabilities totalling S$339.5m more than its cash and near-term receivables, combined.

Singapore Post has a market capitalization of S$1.54b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Singapore Post also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Singapore Post's saving grace is its low debt levels, because its EBIT has tanked 39% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Singapore Post 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. Singapore Post 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. Happily for any shareholders, Singapore Post actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

Although Singapore Post'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$195.1m. And it impressed us with free cash flow of S$238m, being 116% of its EBIT. So we are not troubled with Singapore Post's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Singapore Post , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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