Does Keppel (SGX: BN4) use debt wisely?
Warren Buffett said: “Volatility is far from synonymous with risk”. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Above all, Keppel Corporation Limited (SGX: BN4) carries the debt. But does this debt worry shareholders?
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance their growth without negative consequences. When we look at debt levels, we first look at cash and debt levels, together.
Check out our latest analysis for Keppel
What is Keppel’s debt?
As you can see below, Keppel had S $ 12.1 billion in debt in June 2021, up from S $ 13.0 billion the year before. However, it has S $ 2.40 billion offsetting this, which leads to net debt of around S $ 9.66 billion.
How strong is Keppel’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Keppel had S $ 11.0 billion in liabilities due within 12 months and S $ 8.4 billion in liabilities beyond. In compensation for these obligations, he had cash of S $ 2.40 billion as well as debts valued at S $ 5.40 billion due within 12 months. As a result, its liabilities total $ 11.6 billion more than the combination of its cash and short-term receivables.
Given that this deficit is actually greater than the company’s market cap of S $ 9.72 billion, we believe shareholders should really watch Keppel’s debt levels, like a parent watching their child do. cycling for the first time. In the event that the company were to clean up its balance sheet quickly, it seems likely that shareholders would suffer significant dilution. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Keppel’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 analyst earnings forecast report interesting.
Over 12 months, Keppel recorded a loss in EBIT and saw its revenue fall to S $ 7.1 billion, a decrease of 5.1%. This is not what we hope to see.
Over the past twelve months, Keppel has recorded a loss of profit before interest and taxes (EBIT). To be precise, the EBIT loss amounted to S $ 628 million. Considering that aside from the liabilities mentioned above, we are nervous about the business. We would like to see big improvements in the short term before we get too interested in the title. Notably because he spent S $ 218 million on negative free cash flow in the past year. Suffice it to say that we consider the title risky. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, Keppel has 3 warning signs (and 1 which is a bit disturbing) we think you should be aware of.
If you want to invest in companies that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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