When Seanergy Maritime Holdings Corp. (NASDAQ:SHIP) reported its results to December 2019 its auditors, Ernst & Young LLP could not be sure that it would be able to continue as a going concern in the next year. It is therefore fair to assume that, based on those financials, the company should strengthen its balance sheet in the short term, perhaps by issuing shares.
Since the company probably needs cash fairly quickly, it may be in a position where it has to accept whatever terms it can get. So it is suddenly extremely important to consider whether the company is taking too much risk on its balance sheet. The big consideration is whether it can repay its debt, since in the worst case scenario, creditors could force the company to bankruptcy.
What Is Seanergy Maritime Holdings’s Net Debt?
As you can see below, Seanergy Maritime Holdings had US$197.7m of debt at December 2019, down from US$225.7m a year prior. On the flip side, it has US$13.7m in cash leading to net debt of about US$184.0m.
How Strong Is Seanergy Maritime Holdings’s Balance Sheet?
The latest balance sheet data shows that Seanergy Maritime Holdings had liabilities of US$237.3m due within a year, and liabilities of US$15.4m falling due after that. Offsetting these obligations, it had cash of US$13.7m as well as receivables valued at US$1.76m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$237.3m.
This deficit casts a shadow over the US$6.79m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Seanergy Maritime Holdings would probably need a major re-capitalization if its creditors were to demand repayment.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Weak interest cover of 0.62 times and a disturbingly high net debt to EBITDA ratio of 8.0 hit our confidence in Seanergy Maritime Holdings like a one-two punch to the gut. The debt burden here is substantial. Fortunately, Seanergy Maritime Holdings grew its EBIT by 4.3% in the last year, slowly shrinking its debt relative to earnings. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Seanergy Maritime Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it’s worth checking how much of that EBIT is backed by free cash flow. During the last three years, Seanergy Maritime Holdings burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
To be frank both Seanergy Maritime Holdings’s conversion of EBIT to free cash flow and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least its EBIT growth rate is not so bad. After considering the datapoints discussed, we think Seanergy Maritime Holdings has too much debt. That sort of riskiness is ok for some, but it certainly doesn’t float our boat. While some investors may specialize in these sort of situations, it’s simply too risky and complicated for us to want to invest in a company after an auditor has expressed doubts about its ability to continue as a going concern. Our preference is to invest in companies that always make sure the auditor has confidence that the company will continue as a going concern. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Seanergy Maritime Holdings is showing 5 warning signs in our investment analysis , and 4 of those can’t be ignored…
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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