Here’s why ComfortDelGro (SGX:C52) can manage debt responsibly
Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and every practical investor that I know is worried”. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We note that ComfortDelGro Corporation Limited (SGX:C52) has a debt on its balance sheet. But the real question is whether this debt makes the business risky.
Why is debt risky?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. If things go really bad, lenders can take over the business. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we look at debt levels, we first consider cash and debt levels, together.
See our latest review for ComfortDelGro
What is ComfortDelGro’s debt?
As you can see below, at the end of December 2019, ComfortDelGro had a debt of S$530.1 million, compared to S$485.2 million a year ago. Click on the image for more details. However, he has S$594.2 million to offset this, resulting in a net cash of S$64.1 million.
How strong is ComfortDelGro’s balance sheet?
According to the latest published balance sheet, ComfortDelGro had liabilities of S$1.12 billion due within 12 months and liabilities of S$1.25 billion due beyond 12 months. On the other hand, it had cash of S$594.2 million and S$574.2 million of receivables due within one year. It therefore has liabilities totaling S$1.20 billion more than its cash and short-term receivables, combined.
This shortfall is not that bad as ComfortDelGro is worth S$3.29 billion and therefore could probably raise enough capital to shore up its balance sheet, should the need arise. However, it is always worth taking a close look at its ability to repay debt. Despite its notable liabilities, ComfortDelGro has net cash, so it’s fair to say that it doesn’t have a lot of debt!
While ComfortDelGro doesn’t appear to have gained much on the EBIT line, at least earnings are holding steady for now. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine ComfortDelGro’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. ComfortDelGro may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Over the past three years, ComfortDelGro has produced strong free cash flow equivalent to 53% of its EBIT, which is what we expected. This free cash flow puts the company in a good position to repay its debt, should it arise.
Although ComfortDelGro has more liabilities than liquid assets, it also has a net cash position of S$64.1 million. We therefore have no problem with the use of debt by ComfortDelGro. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Take for example the ubiquitous specter of investment risk. We have identified 1 warning sign with ComfortDelGro, and understanding them should be part of your investment process.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.
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