Corporate Interest Rates In Singapore May Be On The Rise: What Should Investors Do About It?

Credit: www.SeniorLiving.Org

Borrowing costs for companies in Singapore may be on the rise. As Melissa Tan from The Straits Times wrote last week:

“The three-month Singapore swap offer rate [SOR], a market benchmark for commercial loans, has shot up from 0.2 per cent a year ago to 0.8 per cent now, according to Bloomberg data.”

This won’t come as good news for firms that have balance sheets that are laden with debt.

If interest rates do continue rising (no one knows for sure what will happen), such firms may see their profits suffer when they have to refinance their debt at higher borrowing costs.

The importance of strong balance sheets

A focus on the strength of a company’s balance sheet is always important for investors. The legendary investor Walter Schloss once said, “I like to look at the balance sheet and I don’t like debt because it can really get a company into trouble.”

In times like these – when interest rates are climbing while the low-level of rates prevalent over the past few years may have tempted some firms to get drunk on debt in the pursuit of growth – it becomes especially important for investors to care about the strength of their companies’ balance sheets.

After all, it won’t be nice to find out our companies have run into trouble with their creditors, or have suffered sharp profit declines, all due to the onerous effects of higher interest rates.

Some superstars

But while companies which are up to their neck in debt have to fret about where the SOR will be moving to next, the quartet of Kingsmen Creatives Ltd (SGX: 5MZ), Vicom Limited (SGX: V01),  Raffles Medical Group Ltd (SGX: R01), and Straco Corporation Ltd (SGX: S85) likely couldn’t care less.

That’s because for the past five years, they have largely had rock-solid balance sheets that are flush with cash and have minimal (sometimes even zero) borrowings. This is shown in the chart below (click for larger image):

Balance sheet history for Kingsmen Creatives, Vicom, Raffles Medical, and Straco

Source: S&P Capital IQ

In addition, the quartet have not needed much debt if at all, to generate good returns for their shareholders. This is evidenced by how their returns on equity have been really strong since 2010 (with a figure of at least 14% over the past few years) despite having clean balance sheets.

Returns on equity (ROE) history for Kingsmen Creatives, Vicom, Raffles Medical, and Straco

Source: S&P Capital IQ

A Fool’s take

There’s a risk of interest rates continuing to climb in the future in Singapore although no one really knows for sure. But there’s no need to even worry about it if the companies you own have rock-solid balance sheets and do not need to depend on debt to grow or run their businesses.

In fact, if the shares you own have competitors that are heavily-leveraged, you might even welcome higher interest rates as that can help weed out your companies’ weaker competitors and allow them to emerge with even higher market share.

For more investing analyses and important updates about the stock market, sign up to The Motley Fool Singapore's free weekly investing newsletter, Take Stock Singapore. Written by David Kuo, it can help you grow your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Kingsmen Creatives, Vicom, and Raffles Medical Group.