Bhagwan Marine (ASX:BWN) Has A Pretty Healthy Balance Sheet

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Bhagwan Marine Limited (ASX:BWN) does use debt in its business. But the real question is whether this debt is making the company risky.

We've discovered 2 warning signs about Bhagwan Marine. View them for free.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Bhagwan Marine Carry?

You can click the graphic below for the historical numbers, but it shows that Bhagwan Marine had AU$3.59m of debt in December 2024, down from AU$78.3m, one year before. However, because it has a cash reserve of AU$116.0k, its net debt is less, at about AU$3.48m.

How Strong Is Bhagwan Marine's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bhagwan Marine had liabilities of AU$69.8m due within 12 months and liabilities of AU$11.3m due beyond that. Offsetting this, it had AU$116.0k in cash and AU$60.2m in receivables that were due within 12 months. So its liabilities total AU$20.8m more than the combination of its cash and short-term receivables.

Given Bhagwan Marine has a market capitalization of AU$145.9m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

Check out our latest analysis for Bhagwan Marine

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Looking at its net debt to EBITDA of 0.10 and interest cover of 3.1 times, it seems to us that Bhagwan Marine is probably using debt in a pretty reasonable way. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. If Bhagwan Marine can keep growing EBIT at last year's rate of 15% over the last year, then it will find its debt load easier to manage. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Bhagwan Marine will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the most recent three years, Bhagwan Marine recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Happily, Bhagwan Marine's impressive net debt to EBITDA implies it has the upper hand on its debt. But the stark truth is that we are concerned by its interest cover. We would also note that Infrastructure industry companies like Bhagwan Marine commonly do use debt without problems. Looking at the bigger picture, we think Bhagwan Marine's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. 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. For instance, we've identified 2 warning signs for Bhagwan Marine that you should be aware of.

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.

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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.