Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, SATS Ltd. (SGX:S58) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does SATS Carry?
You can click the graphic below for the historical numbers, but it shows that SATS had S$98.0m of debt in June 2019, down from S$106.5m, one year before. However, it does have S$401.7m in cash offsetting this, leading to net cash of S$303.7m.
How Healthy Is SATS's Balance Sheet?
According to the last reported balance sheet, SATS had liabilities of S$408.7m due within 12 months, and liabilities of S$387.8m due beyond 12 months. On the other hand, it had cash of S$401.7m and S$305.4m worth of receivables due within a year. So it has liabilities totalling S$89.4m more than its cash and near-term receivables, combined.
Having regard to SATS's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the S$5.43b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, SATS boasts net cash, so it's fair to say it does not have a heavy debt load!
The good news is that SATS has increased its EBIT by 4.1% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine SATS's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While SATS 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, SATS generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
We could understand if investors are concerned about SATS's liabilities, but we can be reassured by the fact it has has net cash of S$303.7m. And it impressed us with free cash flow of S$205m, being 82% of its EBIT. So we don't think SATS's use of debt is risky. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check SATS's dividend history, without delay!
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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