These 4 metrics indicate that SATS (SGX: S58) is using debt reasonably well
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. We note that SATS Ltd. (SGX: S58) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Check out our latest review for SATS
How much debt does SATS have?
As you can see below, SATS was in debt of S $ 678.5 million in June 2021, up from S $ 770.3 million the year before. But he also has S $ 753.0 million in cash to make up for that, which means he has a net cash of S $ 74.5 million.
How healthy is the SATS track record?
According to the latest published balance sheet, SATS had liabilities of S $ 560.9 million due within 12 months and liabilities of S $ 678.5 million due beyond 12 months. In return, he had S $ 753.0 million in cash and S $ 292.7 million in receivables due within 12 months. It therefore has a liability totaling $ 193.7 million more than its cash and short-term receivables combined.
Given that SATS has a market capitalization of S $ 4.70 billion, it’s hard to believe that these liabilities pose a big threat. Having said that, it is clear that we must continue to monitor his record lest it get worse. While it has notable liabilities, SATS also has more cash than debt, so we’re pretty confident that it can handle its debt safely.
Shareholders should know that SATS EBIT fell 78% last year. If this earnings trend continues, paying off debt will be about as easy as driving cats on a roller coaster. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether SATS can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. While SATS has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building (or erodes) that cash balance. . Over the past three years, SATS has generated free cash flow of a very strong 91% of its EBIT, more than we expected. This positions it well to repay debt if it is desirable.
While it always makes sense to look at a company’s total liabilities, it is very reassuring that SATS has S $ 74.5 million in net cash. The icing on the cake was that he converted 91% of that EBIT into free cash flow, bringing in S $ 136 million. So we have no problem with the use of debt by SATS. Although SATS did not make a statutory profit last year, its positive EBIT suggests that profitability may not be far off. Click here to see if its profits are heading in the right direction over the medium term.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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 any of the stocks mentioned.
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