Does Seamec (NSE:SEAMECLTD) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Seamec Limited (NSE:SEAMECLTD) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Seamec

What Is Seamec's Debt?

The image below, which you can click on for greater detail, shows that Seamec had debt of ₹397.8m at the end of September 2020, a reduction from ₹820.9m over a year. However, it does have ₹1.96b in cash offsetting this, leading to net cash of ₹1.56b.

How Strong Is Seamec's Balance Sheet?

The latest balance sheet data shows that Seamec had liabilities of ₹1.72b due within a year, and liabilities of ₹918.5m falling due after that. On the other hand, it had cash of ₹1.96b and ₹874.4m worth of receivables due within a year. So it can boast ₹191.0m more liquid assets than total liabilities.

Having regard to Seamec's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹11.4b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Seamec boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Seamec if management cannot prevent a repeat of the 59% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Seamec will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Seamec may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Seamec actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Seamec has net cash of ₹1.56b, as well as more liquid assets than liabilities. The cherry on top was that in converted 108% of that EBIT to free cash flow, bringing in ₹1.4b. So we are not troubled with Seamec's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Seamec that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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