Health Check: How Prudently Does Scomi Energy Services Bhd (KLSE:SCOMIES) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Scomi Energy Services Bhd (KLSE:SCOMIES) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. 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 June 2021, Scomi Energy Services Bhd had RM131.9m of debt, up from RM124.6m a year ago. Click the image for more detail. However, it does have RM58.5m in cash offsetting this, leading to net debt of about RM73.5m.

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

We can see from the most recent balance sheet that Scomi Energy Services Bhd had liabilities of RM289.0m falling due within a year, and liabilities of RM7.92m due beyond that. Offsetting these obligations, it had cash of RM58.5m as well as receivables valued at RM88.8m due within 12 months. So it has liabilities totalling RM149.7m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the RM37.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Scomi Energy Services Bhd would likely require a major re-capitalisation if it had to pay its creditors today. 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 RM308m, which is a fall of 27%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Scomi Energy Services Bhd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable RM12m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost RM212m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. 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. Be aware that Scomi Energy Services Bhd is showing 2 warning signs in our investment analysis , you should know about...

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.

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.

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