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.' 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. Importantly,  SATS Ltd.  (SGX:S58) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can' t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 SATS

How Much Debt Does SATS Carry?

You can click the graphic below for the historical numbers, but it shows that SATS had S$538.1m of debt in September 2021, down from S$686.2m, one year before. However, its balance sheet shows it holds S$685.5m in cash, so it actually has S$147.4m net cash. SGX:S58 Debt to Equity History January 28th 2022

How Healthy Is SATS' Balance Sheet?

We can see from the most recent balance sheet that SATS had liabilities of S$457.3m falling due within a year, and liabilities of S$772.5m due beyond that. Offsetting these obligations, it had cash of S$685.5m as well as receivables valued at S$358.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$186.1m.

Given SATS has a market capitalization of S$4.38b, it' s hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, SATS also has more cash than debt, so we' re pretty confident it can manage its debt safely.

Shareholders should be aware that SATS' s EBIT was down 56% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There' s no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if SATS can strengthen its balance sheet over time. So if you' re focused on the future you can check out this  free  report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While SATS 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. During the last three years, SATS generated free cash flow amounting to a very robust 96% of its EBIT, more than we' d expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to look at a company' s total liabilities, it is very reassuring that SATS has S$147.4m in net cash. The cherry on top was that in converted 96% of that EBIT to free cash flow, bringing in S$22m. So we are not troubled with SATS' s debt use. There' s no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that  SATS is showing  1 warning sign in our investment analysis  , you should know about...

Of course, if you' re the type of investor who prefers buying stocks without the burden of debt, then don' t hesitate to discover  our exclusive list of net cash growth stocks, today.

Ownership	Name	Shares	Current Value	Change %	Portfolio %
39.76%	Temasek Holdings (Private) Limited	446,193,251	SGD1.9b	0%	1.29%
4.97%	BlackRock, Inc.	55,800,031	SGD236.6m	0%	no data
3.65%	Matthews International Capital Management, LLC	40,912,200	SGD173.5m	0%	0.51%
1.86%	The Vanguard Group, Inc.	20,816,196	SGD88.3m	3.45%	no data
1.49%	Schroder Investment Management (Singapore) Ltd	16,715,200	SGD70.9m	0%	0.26%
1.08%	Norges Bank Investment Management	12,072,298	SGD51.2m	0%	no data
0.96%	BLI - Banque De Luxembourg Investments S.A.	10,743,400	SGD45.6m	0%	0.32%
0.82%	PineBridge Investments LLC	9,246,200	SGD39.2m	0%	0.19%
0.66%	Lazard Asset Management LLC	7,461,600	SGD31.6m	2.12%	0.02%
0.37%	HSBC Global Asset Management (UK) Limited	4,184,402	SGD17.7m	-0.05%	0.01%
0.35%	Alexander Charles Hungate	3,917,136	SGD16.6m	0%	no data
0.32%	abrdn plc	3,600,300	SGD15.3m	0%	0.01%
0.29%	Lannebo Fonder AB	3,208,848	SGD13.6m	0%	0.13%
0.29%	Handelsbanken Asset Management	3,199,787	SGD13.6m	0%	0.02%
0.25%	Ifast Financial Pte. Ltd., Asset Management Arm	2,785,813	SGD11.8m	0%	2.83%
0.24%	Nikko Asset Management Co., Ltd.	2,691,473	SGD11.4m	0%	no data
0.24%	Charles Schwab Investment Management, Inc.	2,674,322	SGD11.3m	1%	no data
0.22%	Siew Eng Heng	2,475,000	SGD10.5m	0%	no data
0.19%	Catella FondfÖ Rvaltning Ab	2,084,173	SGD8.8m	0%	0.78%
0.18%	Nordea Investment Management AB	2,022,723	SGD8.6m	0%	no data
0.17%	Affin Hwang Asset Management Berhad	1,951,100	SGD8.3m	0%	0.34%
0.17%	Chuan Lye Tan	1,923,301	SGD8.2m	0%	no data
0.15%	Chee Chong Yim	1,692,500	SGD7.2m	0%	no data
0.15%	Fullerton Fund Management Company Ltd.	1,679,944	SGD7.1m	0%	0.15%
0.15%	Dimensional Fund Advisors LP	1,632,104	SGD6.9m	-29.73%	no data