SRT Marine Systems (LON:SRT) Is Making Moderate Use Of Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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 Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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 March 2021 SRT Marine Systems had debt of UK£8.52m, up from UK£4.99m in one year. However, it does have UK£5.29m in cash offsetting this, leading to net debt of about UK£3.23m.

How Healthy Is SRT Marine Systems' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SRT Marine Systems had liabilities of UK£10.4m due within 12 months and liabilities of UK£861.4k due beyond that. On the other hand, it had cash of UK£5.29m and UK£3.60m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£2.40m.

Since publicly traded SRT Marine Systems shares are worth a total of UK£65.7m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, SRT Marine Systems made a loss at the EBIT level, and saw its revenue drop to UK£8.3m, which is a fall of 56%. That makes us nervous, to say the least.

Caveat Emptor

While SRT Marine Systems's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at UK£4.9m. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through UK£273k of cash over the last year. So suffice it to say we do consider the stock to be risky. 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 example, we've discovered 2 warning signs for SRT Marine Systems (1 is significant!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.
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