Is SATS (SGX:S58) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that SATS Ltd. (SGX:S58) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for SATS

What Is SATS's Debt?

You can click the graphic below for the historical numbers, but it shows that SATS had S$510.8m of debt in March 2022, down from S$678.1m, one year before. However, it does have S$786.0m in cash offsetting this, leading to net cash of S$275.2m.

How Strong Is SATS' Balance Sheet?

The latest balance sheet data shows that SATS had liabilities of S$630.6m due within a year, and liabilities of S$828.0m falling due after that. Offsetting this, it had S$786.0m in cash and S$390.1m in receivables that were due within 12 months. So it has liabilities totalling S$282.5m more than its cash and near-term receivables, combined.

Of course, SATS has a market capitalization of S$4.43b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, SATS also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if SATS can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year SATS wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to S$1.2b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is SATS?

Although SATS had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of S$20m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. One positive is that SATS is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock 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 1 warning sign for SATS that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.