Does International Cement Group (SGX:KUO)
Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly,  International Cement Group Ltd.  (SGX:KUO) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of ' creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company' s debt levels is to consider its cash and debt together.

How Much Debt Does International Cement Group Carry?

The image below, which you can click on for greater detail, shows that International Cement Group had debt of S$13.5m at the end of June 2021, a reduction from S$15.8m over a year. However, its balance sheet shows it holds S$32.1m in cash, so it actually has S$18.6m net cash.

How Healthy Is International Cement Group' s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that International Cement Group had liabilities of S$62.3m due within 12 months and liabilities of S$41.3m due beyond that. On the other hand, it had cash of S$32.1m and S$23.9m worth of receivables due within a year. So it has liabilities totalling S$47.6m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since International Cement Group has a market capitalization of S$166.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, International Cement Group also has more cash than debt, so we' re pretty confident it can manage its debt safely.

Another good sign is that International Cement Group has been able to increase its EBIT by 20% in twelve months, making it easier to pay down debt. There' s no doubt that we learn most about debt from the balance sheet. But you can' t view debt in total isolation since International Cement Group will need earnings to service that debt. So if you' re keen to discover more about its earnings, it might be worth checking out  this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt accounting profits just don' t cut it. While International Cement Group 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. Looking at the most recent three years, International Cement Group recorded free cash flow of 23% of its EBIT, which is weaker than we' d expect. That' s not great when it comes to paying down debt.

Summing up

Although International Cement Group' s balance sheet isn' t particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of S$18.6m. And we liked the look of last year' s 20% year-on-year EBIT growth. So we don' t have any problem with International Cement Group' s use of debt. The balance sheet is clearly the area to focus on when you are analyzing debt. But ultimately, every company can contain risks that exist outside of the balance sheet.  This article by Simply Wall St is general in nature. 

By  Simply Wall St
Published
September 03, 2021

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