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The external fund manager backed by Berkshire Hathaway' s Charlie Munger, Li Lu, makes no bones about it when he says ' The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that  SATS Ltd.  (SGX:S58) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company' s debt levels is to consider its cash and debt together.

View our latest analysis for SATS

What Is SATS' s Net Debt?

The image below, which you can click on for greater detail, shows that SATS had debt of S$515.7m at the end of September 2022, a reduction from S$538.1m over a year. However, it does have S$689.3m in cash offsetting this, leading to net cash of S$173.6m.
SGX:S58 Debt to Equity History January 16th 2023

How Healthy Is SATS' Balance Sheet?

We can see from the most recent balance sheet that SATS had liabilities of S$722.7m falling due within a year, and liabilities of S$827.7m due beyond that. Offsetting these obligations, it had cash of S$689.3m as well as receivables valued at S$515.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$346.1m.

Of course, SATS has a market capitalization of S$3.27b, so these liabilities are probably manageable. 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. There' s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine SATS' s ability to maintain a healthy balance sheet going forward. So if you' re focused on the future you can check out this  free  report showing analyst profit forecasts.

In the last year SATS wasn' t profitable at an EBIT level, but managed to grow its revenue by 28%, to S$1.4b. With any luck the company will be able to grow its way to profitability.

So How Risky Is SATS?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months SATS lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through S$62m of cash and made a loss of S$25m. With only S$173.6m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, SATS may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we' re providing readers this interactive graph showing how SATS' s  profit, revenue, and operating cashflow have changed over the last few years.