These 4 metrics indicate that EnGro (SGX:S44) is using debt reasonably well
Warren Buffett said: “Volatility is far from synonymous with risk. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We can see that EnGro Corporation Limited (SGX:S44) uses debt in his business. But the real question is whether this debt makes the business risky.
Why is debt risky?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we think about a company’s use of debt, we first look at cash and debt together.
Our analysis indicates that S44 is potentially undervalued!
What is EnGro’s net debt?
The image below, which you can click on for more details, shows that EnGro had a debt of S$5.64 million at the end of June 2022, a reduction from S$6.15 million on a year. But on the other hand, he also has S$70.4 million in cash, resulting in a net cash position of S$64.8 million.
How strong is EnGro’s balance sheet?
We can see from the most recent balance sheet that EnGro had liabilities of S$18.9 million falling due within one year, and liabilities of S$21.5 million due beyond. In return, he had S$70.4 million in cash and S$34.1 million in debt due within 12 months. It can therefore boast that it has S$64.2 million more in cash than total Passives.
This luscious liquidity means that EnGro’s balance sheet is as strong as a giant redwood. Given this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that EnGro has more cash than debt is arguably a good indication that it can safely manage its debt.
It was also good to see that despite losing money on the EBIT line last year, EnGro turned things around in the last 12 months, delivering an EBIT of S$1.1 million. The balance sheet is clearly the area to focus on when analyzing debt. But it is EnGro’s earnings that will influence the balance sheet in the future. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. Although EnGro has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how fast it’s building ( or erodes) this cash balance. . Over the past year, EnGro has burned through a lot of cash. While this may be the result of spending for growth, it makes debt much riskier.
While it’s always a good idea to investigate a company’s debt, in this case EnGro has S$64.8 million in net cash and a decent balance sheet. So we have no problem with EnGro’s use of debt. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. To do this, you need to find out about the 5 warning signs we spotted with EnGro (including 1 that should not be overlooked).
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
Valuation is complex, but we help make it simple.
Find out if EnGro is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.
See the free analysis
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.