Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Seatrium Limited (SGX:5E2) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Seatrium's Debt?
As you can see below, Seatrium had S$3.44b of debt at June 2024, down from S$3.72b a year prior. However, it also had S$1.64b in cash, and so its net debt is S$1.81b.
How Strong Is Seatrium's Balance Sheet?
According to the last reported balance sheet, Seatrium had liabilities of S$7.76b due within 12 months, and liabilities of S$3.97b due beyond 12 months. Offsetting this, it had S$1.64b in cash and S$6.51b in receivables that were due within 12 months. So its liabilities total S$3.57b more than the combination of its cash and short-term receivables.
Seatrium has a market capitalization of S$6.82b, so it could very likely raise cash to ameliorate 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. 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 Seatrium'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.
In the last year Seatrium wasn't profitable at an EBIT level, but managed to grow its revenue by 125%, to S$8.4b. So its pretty obvious shareholders are hoping for more growth!
Caveat Emptor
While we can certainly appreciate Seatrium's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at S$75m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled S$435m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. For riskier companies like Seatrium I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
