Here's Why Seamec (NSE:SEAMECLTD) Can Manage Its Debt Responsibly

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. We note that Seamec Limited (NSE:SEAMECLTD) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Seamec

What Is Seamec's Debt?

You can click the graphic below for the historical numbers, but it shows that Seamec had ₹1.37b of debt in September 2022, down from ₹1.43b, one year before. However, it does have ₹1.47b in cash offsetting this, leading to net cash of ₹100.1m.

A Look At Seamec's Liabilities

According to the last reported balance sheet, Seamec had liabilities of ₹1.40b due within 12 months, and liabilities of ₹820.0m due beyond 12 months. Offsetting these obligations, it had cash of ₹1.47b as well as receivables valued at ₹929.2m due within 12 months. So it actually has ₹183.5m more liquid assets than total liabilities.

This state of affairs indicates that Seamec's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹18.0b 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!

In addition to that, we're happy to report that Seamec has boosted its EBIT by 67%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Seamec'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Seamec has ₹100.1m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 67% over the last year. So we are not troubled with Seamec's debt use. 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. To that end, you should learn about the 2 warning signs we've spotted with Seamec (including 1 which can't be ignored) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.