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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Spindex Industries Limited (SGX:564) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Spindex Industries
How Much Debt Does Spindex Industries Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Spindex Industries had S$257.0k of debt, an increase on none, over one year. But it also has S$42.3m in cash to offset that, meaning it has S$42.0m net cash.
A Look At Spindex Industries's Liabilities
We can see from the most recent balance sheet that Spindex Industries had liabilities of S$39.2m falling due within a year, and liabilities of S$2.92m due beyond that. Offsetting this, it had S$42.3m in cash and S$31.9m in receivables that were due within 12 months. So it actually has S$32.0m more liquid assets than total liabilities.
This excess liquidity suggests that Spindex Industries is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Spindex Industries boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Spindex Industries has boosted its EBIT by 57%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Spindex Industries's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Spindex Industries 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. Looking at the most recent three years, Spindex Industries recorded free cash flow of 44% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.