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 can see that Delfi Limited (SGX: P34) uses debt in his business. But should shareholders be concerned about its use of debt?
When is debt dangerous?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. If things really go wrong, lenders can take over the business. 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. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first consider both liquidity and debt levels.
See our latest analysis for Delfi
What is Delfi’s net debt?
As you can see below, Delfi was in debt of $ 48.7 million in December 2020, up from $ 58.3 million the year before. But it also has $ 68.4 million in cash to make up for that, which means it has $ 19.7 million in net cash.
How strong is Delfi’s balance sheet?
According to the latest published balance sheet, Delfi had debts of US $ 139.7 million due within 12 months, and debts of US $ 17.0 million due beyond 12 months. In compensation for these obligations, he had cash of US $ 68.4 million as well as receivables valued at US $ 95.1 million within 12 months. So he actually has $ 6.75 million After liquid assets as total liabilities.
This state of affairs indicates that Delfi’s balance sheet looks quite strong, as its total liabilities are roughly equal to its liquid assets. So the $ 442.9 million company is highly unlikely to run out of cash, but it’s still worth keeping an eye on the balance sheet. In short, Delfi has a net cash flow, so it’s fair to say that she doesn’t have a lot of debt!
Fortunately, Delfi’s load is not too heavy, as its EBIT has fallen by 37% compared to last year. Falling profits (if the trend continues) could eventually make even small debt risky enough. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Delfi 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.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. While Delfi has net cash on his balance sheet, it’s still worth looking at his ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast he’s building (or erodes) that cash balance. . Over the past three years, Delfi’s free cash flow has amounted to 43% of its EBIT, less than we expected. This low cash conversion makes debt management more difficult.
While it’s always a good idea to investigate a company’s debt, in this case Delfi has US $ 19.7 million in net cash and a decent balance sheet. We are therefore not concerned with Delfi’s use of debt. 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, we discovered 1 warning sign for Delfi which you should know before investing here.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
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