SUTL Enterprise (SGX:BHU) Has A Pretty Healthy Balance Sheet
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that SUTL Enterprise Limited (SGX:BHU) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for SUTL Enterprise
What Is SUTL Enterprise's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 SUTL Enterprise had S$665.0k of debt, an increase on none, over one year. However, it does have S$44.8m in cash offsetting this, leading to net cash of S$44.1m.
A Look At SUTL Enterprise's Liabilities
The latest balance sheet data shows that SUTL Enterprise had liabilities of S$10.8m due within a year, and liabilities of S$56.1m falling due after that. Offsetting this, it had S$44.8m in cash and S$3.77m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$18.4m.
SUTL Enterprise has a market capitalization of S$48.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, SUTL Enterprise also has more cash than debt, so we're pretty confident it can manage its debt safely.
On the other hand, SUTL Enterprise's EBIT dived 17%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since SUTL Enterprise 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. SUTL Enterprise 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. During the last three years, SUTL Enterprise produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
Summing up
Although SUTL Enterprise'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$44m. So we are not troubled with SUTL Enterprise's debt use. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check SUTL Enterprise's dividend history, without delay!
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
