CSE Global (SGX: 544) seems to use debt rather sparingly
David Iben put it well when he said: “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ 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 notice that CSE Global Limited (SGX: 544) has debt on its balance sheet. But should shareholders be concerned about its use of debt?
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest analysis for CSE Global
What is CSE Global’s net debt?
The image below, which you can click for more details, shows that CSE Global had a debt of S $ 93.7 million at the end of December 2020, a reduction from S $ 103.1 million on a year. However, he also had S $ 52.5 million in cash, so his net debt is S $ 41.2 million.
A look at the responsibilities of CSE Global
The latest balance sheet data shows that CSE Global had liabilities of S $ 161.1 million due within one year, and liabilities of S $ 49.1 million due thereafter. On the other hand, it had S $ 52.5 million in cash and S $ 168.6 million in receivables due within one year. He can therefore boast of S $ 10.9 million in liquid assets more than total Liabilities.
This surplus suggests that CSE Global has a prudent balance sheet and could likely eliminate its debt without too much difficulty.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
CSE Global’s net debt is only 0.82 times its EBITDA. And its EBIT covers its interest costs 14.5 times more. So we’re pretty relaxed about its ultra-conservative use of debt. And we also warmly note that CSE Global increased its EBIT by 19% last year, which makes its debt more manageable. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether CSE Global 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. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, CSE Global has recorded free cash flow of 73% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This hard cash allows him to reduce his debt whenever he wants.
Our point of view
CSE Global’s interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. And the good news does not end there, since its conversion of EBIT into free cash flow also confirms this impression! Considering this range of factors, it seems to us that CSE Global is fairly conservative with its debt, and the risks appear to be well managed. The balance sheet therefore seems rather healthy to us. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 2 warning signs for CSE Global which you should know before investing here.
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.
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