Stock Analysis

Is BOMESC Offshore Engineering (SHSE:603727) A Risky Investment?

SHSE:603727
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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. We can see that BOMESC Offshore Engineering Company Limited (SHSE:603727) does use debt in its business. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is BOMESC Offshore Engineering's Net Debt?

As you can see below, BOMESC Offshore Engineering had CN¥598.1m of debt at December 2024, down from CN¥680.2m a year prior. However, its balance sheet shows it holds CN¥833.3m in cash, so it actually has CN¥235.2m net cash.

debt-equity-history-analysis
SHSE:603727 Debt to Equity History March 22nd 2025

A Look At BOMESC Offshore Engineering's Liabilities

We can see from the most recent balance sheet that BOMESC Offshore Engineering had liabilities of CN¥2.14b falling due within a year, and liabilities of CN¥67.4m due beyond that. Offsetting these obligations, it had cash of CN¥833.3m as well as receivables valued at CN¥1.35b due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to BOMESC Offshore Engineering's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥4.32b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, BOMESC Offshore Engineering boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for BOMESC Offshore Engineering

Although BOMESC Offshore Engineering made a loss at the EBIT level, last year, it was also good to see that it generated CN¥224m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if BOMESC Offshore Engineering can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While BOMESC Offshore Engineering has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, BOMESC Offshore Engineering saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about BOMESC Offshore Engineering's liabilities, but we can be reassured by the fact it has has net cash of CN¥235.2m. So we are not troubled with BOMESC Offshore Engineering's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with BOMESC Offshore Engineering , and understanding them should be part of your investment process.

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.

Valuation is complex, but we're here to simplify it.

Discover if BOMESC Offshore Engineering might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.

About SHSE:603727

BOMESC Offshore Engineering

Provides engineering, procurement, and construction (EPC) services for offshore oil and gas industries.

High growth potential with adequate balance sheet.

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