Jardine Cycle & Carriage (SGX: C07) seems to be using debt quite wisely
Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Above all, Jardine Cycle & Carriage Limited (SGX:C07) is in debt. But the real question is whether this debt makes the business risky.
What risk does debt carry?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest review for Jardine Cycle & Carriage
How much debt does Jardine Cycle & Carriage have?
As you can see below, Jardine Cycle & Carriage had US$6.56 billion in debt as of December 2021, up from US$7.13 billion the previous year. However, he has $4.26 billion in cash to offset this, resulting in a net debt of around $2.30 billion.
How healthy is Jardine Cycle & Carriage’s balance sheet?
We can see from the most recent balance sheet that Jardine Cycle & Carriage had liabilities of $7.58 billion due in one year and liabilities of $5.08 billion beyond. In return, it had $4.26 billion in cash and $2.86 billion in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and (current) receivables by $5.54 billion.
This is a mountain of leverage compared to its market capitalization of US$8.51 billion. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet quickly.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Jardine Cycle & Carriage has a low net debt to EBITDA ratio of just 0.91. And its EBIT covers its interest charges 101 times. So we’re pretty relaxed about his super conservative use of debt. And we also warmly note that Jardine Cycle & Carriage increased its EBIT by 12% last year, making its leverage more manageable. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Jardine Cycle & Carriage’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a company can only repay its debts with cold hard cash, not with book profits. We therefore always check how much of this EBIT is converted into free cash flow. Fortunately for all shareholders, Jardine Cycle & Carriage has actually produced more free cash flow than EBIT for the past three years. This kind of high cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Our point of view
The good news is that Jardine Cycle & Carriage’s demonstrated ability to cover its interest costs with its EBIT delights us like a fluffy puppy does a toddler. But, on a darker note, we’re a bit concerned about his total passive level. Given all of this data, it seems to us that Jardine Cycle & Carriage is taking a pretty sensible approach to debt. This means they take on a bit more risk, hoping to increase shareholder returns. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. To this end, you should be aware of the 1 warning sign we spotted with Jardine Cycle & Carriage.
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.