$SATS LTD.(S58.SI)$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, $SATS LTD.(S58.SI)$ does carry debt. But is this debt a concern to shareholders? [smile] [smile] [smile] 

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. 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. [Happy] [Happy] [Happy] 

What Is SATS's Debt?

The image below, which you can click on for greater detail, shows that SATS had debt of S$770.7m at the end of December 2021, a reduction from S$895.7m over a year. However, it also had S$678.3m in cash, and so its net debt is S$92.4m. [Miser] [Miser] [Miser] 

How Strong Is SATS' Balance Sheet?

The latest balance sheet data shows that SATS had liabilities of S$483.0m due within a year, and liabilities of S$770.7m falling due after that. On the other hand, it had cash of S$678.3m and S$358.2m worth of receivables due within a year. So its liabilities total S$217.2m more than the combination of its cash and short-term receivables. [What] [What] [What] 

Since publicly traded SATS shares are worth a total of S$4.85b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. [LOL] [LOL] [LOL] 

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it. [Sad] [Sad] [Speechless] 

SATS has a very low debt to EBITDA ratio of 0.77 so it is strange to see weak interest coverage, with last year's EBIT being only 1.2 times the interest expense. So while we're not necessarily alarmed we think that its debt is far from trivial. It is well worth noting that SATS's EBIT shot up like bamboo after rain, gaining 90% in the last twelve months. That'll make it easier to manage its debt. 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. [Sly] [Sly] [Sly] 

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Happily for any shareholders, SATS actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert. [Drowsy] [Drowsy] [Drowsy] 

Happily, SATS's impressive conversion of EBIT to free cash flow implies it has the upper hand on its debt. But the stark truth is that we are concerned by its interest cover. It's also worth noting that SATS is in the Infrastructure industry, which is often considered to be quite defensive. Looking at the bigger picture, we think SATS's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that SATS is showing 1 warning sign in our investment analysis , you should know about...

@StarLuck@MSing@koolgal@Venus_M@HelenJanet@SR050321@Bonta@KYHBKO

@TigerStarsPlease pick and like.