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. Importantly, ComfortDelGro Corporation Limited (SGX:C52) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is ComfortDelGro's Debt?
As you can see below, at the end of June 2024, ComfortDelGro had S$677.2m of debt, up from S$311.9m a year ago. Click the image for more detail. However, its balance sheet shows it holds S$883.7m in cash, so it actually has S$206.5m net cash.
A Look At ComfortDelGro's Liabilities
We can see from the most recent balance sheet that ComfortDelGro had liabilities of S$1.27b falling due within a year, and liabilities of S$808.4m due beyond that. Offsetting this, it had S$883.7m in cash and S$717.1m in receivables that were due within 12 months. So its liabilities total S$481.8m more than the combination of its cash and short-term receivables.
Given ComfortDelGro has a market capitalization of S$3.25b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, ComfortDelGro also has more cash than debt, so we're pretty confident it can manage its debt safely.
In addition to that, we're happy to report that ComfortDelGro has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if ComfortDelGro 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. While ComfortDelGro 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. During the last three years, ComfortDelGro generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
Summing Up
While ComfortDelGro does have more liabilities than liquid assets, it also has net cash of S$206.5m. And it impressed us with free cash flow of S$92m, being 89% of its EBIT. So is ComfortDelGro's debt a risk? It doesn't seem so to us. 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. Be aware that ComfortDelGro is showing 1 warning sign in our investment analysis , you should know about...
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.
