Swick Mining Services (ASX:SWK) Is Carrying A Fair Bit Of Debt

Simply Wall St
June 21, 2021
Source: Shutterstock

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. As with many other companies Swick Mining Services Limited (ASX:SWK) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Swick Mining Services

What Is Swick Mining Services's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Swick Mining Services had debt of AU$20.0m, up from AU$18.0m in one year. On the flip side, it has AU$13.0m in cash leading to net debt of about AU$7.04m.

ASX:SWK Debt to Equity History June 22nd 2021

A Look At Swick Mining Services' Liabilities

According to the last reported balance sheet, Swick Mining Services had liabilities of AU$26.8m due within 12 months, and liabilities of AU$32.6m due beyond 12 months. On the other hand, it had cash of AU$13.0m and AU$22.8m worth of receivables due within a year. So it has liabilities totalling AU$23.6m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Swick Mining Services has a market capitalization of AU$56.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Swick Mining Services's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Swick Mining Services made a loss at the EBIT level, and saw its revenue drop to AU$141m, which is a fall of 3.3%. We would much prefer see growth.

Caveat Emptor

Importantly, Swick Mining Services had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost AU$247k at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of AU$3.8m. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Swick Mining Services is showing 3 warning signs in our investment analysis , you should know about...

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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