We Think SRT Marine Systems (LON:SRT) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that SRT Marine Systems plc (LON:SRT) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for SRT Marine Systems

What Is SRT Marine Systems's Net Debt?

As you can see below, at the end of September 2020, SRT Marine Systems had UK£8.49m of debt, up from UK£4.99m a year ago. Click the image for more detail. However, because it has a cash reserve of UK£5.00m, its net debt is less, at about UK£3.49m.

A Look At SRT Marine Systems' Liabilities

Zooming in on the latest balance sheet data, we can see that SRT Marine Systems had liabilities of UK£11.9m due within 12 months and liabilities of UK£978.4k due beyond that. 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 total UK£443.5k more than the combination of its cash and short-term receivables.

This state of affairs indicates that SRT Marine Systems' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the UK£53.4m company is short on cash, but still worth keeping an eye on the balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But it is SRT Marine Systems's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, SRT Marine Systems made a loss at the EBIT level, and saw its revenue drop to UK£19m, which is a fall of 8.2%. 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. To be specific the EBIT loss came in at UK£3.6m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through UK£1.4m of cash over the last year. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that SRT Marine Systems is showing 4 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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.

When trading SRT Marine Systems or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on 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 (at) simplywallst.com.