Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that ComfortDelGro Corporation Limited (SGX:C52) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does ComfortDelGro Carry?

As you can see below, at the end of June 2024, ComfortDelGro had S$677.2m of debt, up from S$311.9m a year ago. Click the image for more detail. However, its balance sheet shows it holds S$883.7m in cash, so it actually has S$206.5m net cash.

How Healthy Is ComfortDelGro's Balance Sheet?

According to the last reported balance sheet, ComfortDelGro had liabilities of S$1.27b due within 12 months, and liabilities of S$808.4m due beyond 12 months. Offsetting these obligations, it had cash of S$883.7m as well as receivables valued at S$717.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$481.8m.

Since publicly traded ComfortDelGro shares are worth a total of S$2.99b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, ComfortDelGro also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that ComfortDelGro has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ComfortDelGro's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. ComfortDelGro may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, ComfortDelGro generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While ComfortDelGro does have more liabilities than liquid assets, it also has net cash of S$206.5m. The cherry on top was that in converted 89% of that EBIT to free cash flow, bringing in S$92m. So is ComfortDelGro's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for ComfortDelGro that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.