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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that Raffles Medical Group Ltd (SGX:BSL) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Raffles Medical Group
What Is Raffles Medical Group's Debt?
As you can see below, at the end of June 2019, Raffles Medical Group had S$125.0m of debt, up from S$91.6m a year ago. Click the image for more detail. On the flip side, it has S$101.9m in cash leading to net debt of about S$23.1m.
How Healthy Is Raffles Medical Group's Balance Sheet?
According to the last reported balance sheet, Raffles Medical Group had liabilities of S$200.1m due within 12 months, and liabilities of S$151.4m due beyond 12 months. Offsetting this, it had S$101.9m in cash and S$92.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$156.9m.
Of course, Raffles Medical Group has a market capitalization of S$1.75b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. But either way, Raffles Medical Group has virtually no net debt, so it's fair to say it does not have a heavy debt load!
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.