Health Check: How Prudently Does Scomi Energy Services Bhd (KLSE:SCOMIES) Use 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Scomi Energy Services Bhd (KLSE:SCOMIES) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Scomi Energy Services Bhd

What Is Scomi Energy Services Bhd's Debt?

As you can see below, at the end of March 2021, Scomi Energy Services Bhd had RM130.4m of debt, up from RM124.6m a year ago. Click the image for more detail. However, it also had RM65.5m in cash, and so its net debt is RM64.9m.

How Healthy Is Scomi Energy Services Bhd's Balance Sheet?

The latest balance sheet data shows that Scomi Energy Services Bhd had liabilities of RM316.1m due within a year, and liabilities of RM13.0m falling due after that. Offsetting this, it had RM65.5m in cash and RM121.0m in receivables that were due within 12 months. So it has liabilities totalling RM142.6m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the RM44.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Scomi Energy Services Bhd would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Scomi Energy Services Bhd 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, Scomi Energy Services Bhd made a loss at the EBIT level, and saw its revenue drop to RM307m, which is a fall of 31%. That makes us nervous, to say the least.

Caveat Emptor

While Scomi Energy Services Bhd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping RM185m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of RM220m in the last year. So we think this stock is quite risky. We'd prefer to pass. 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. To that end, you should learn about the 3 warning signs we've spotted with Scomi Energy Services Bhd (including 1 which is potentially serious) .

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.

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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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