Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Boustead Projects Limited (SGX:AVM) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Boustead Projects

How Much Debt Does Boustead Projects Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2019 Boustead Projects had S$107.9m of debt, an increase on S$69.2m, over one year. However, its balance sheet shows it holds S$115.8m in cash, so it actually has S$7.90m net cash.

A Look At Boustead Projects's Liabilities

The latest balance sheet data shows that Boustead Projects had liabilities of S$150.8m due within a year, and liabilities of S$168.4m falling due after that. On the other hand, it had cash of S$115.8m and S$100.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$102.8m.

This deficit isn't so bad because Boustead Projects is worth S$284.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Boustead Projects boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Boustead Projects grew its EBIT by 5.8% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Boustead Projects's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Boustead Projects 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. Happily for any shareholders, Boustead Projects actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

Although Boustead Projects'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$7.90m. And it impressed us with free cash flow of S$37m, being 122% of its EBIT. So we don't think Boustead Projects's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Boustead Projects's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.