SRT Marine Systems (LON:SRT) Is Carrying A Fair Bit Of Debt

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies SRT Marine Systems plc (LON:SRT) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for SRT Marine Systems

How Much Debt Does SRT Marine Systems Carry?

The image below, which you can click on for greater detail, shows that at September 2020 SRT Marine Systems had debt of UK£8.49m, up from UK£4.99m in one year. On the flip side, it has UK£5.00m in cash leading to net debt of about UK£3.49m.

How Healthy Is SRT Marine Systems's Balance Sheet?

According to the last reported balance sheet, SRT Marine Systems had liabilities of UK£11.9m due within 12 months, and liabilities of UK£978.4k due beyond 12 months. On the other hand, it had cash of UK£5.00m and UK£7.44m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£443.5k.

Having regard to SRT Marine Systems's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the UK£67.3m company is struggling for cash, we still think it's worth monitoring its balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since SRT Marine Systems 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.

In the last year SRT Marine Systems had a loss before interest and tax, and actually shrunk its revenue by 8.2%, to UK£19m. We would much prefer see growth.

Caveat Emptor

Importantly, SRT Marine Systems had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost UK£3.6m at the EBIT level. 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. However, it doesn't help that it burned through UK£1.4m of cash over the last year. So suffice it to say we do consider the stock to be 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. For instance, we've identified 3 warning signs for SRT Marine Systems (1 is significant) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

If you’re looking to trade SRT Marine Systems, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.