Is Scomi Energy Services Bhd (KLSE:SCOMIES) A Risky Investment?

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. Importantly, Scomi Energy Services Bhd (KLSE:SCOMIES) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Scomi Energy Services Bhd

What Is Scomi Energy Services Bhd's Net Debt?

The chart below, which you can click on for greater detail, shows that Scomi Energy Services Bhd had RM127.2m in debt in December 2020; about the same as the year before. However, it also had RM62.9m in cash, and so its net debt is RM64.3m.

A Look At Scomi Energy Services Bhd's Liabilities

We can see from the most recent balance sheet that Scomi Energy Services Bhd had liabilities of RM276.4m falling due within a year, and liabilities of RM13.4m due beyond that. Offsetting these obligations, it had cash of RM62.9m as well as receivables valued at RM132.5m due within 12 months. So it has liabilities totalling RM94.4m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the RM53.9m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. 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 it is Scomi Energy Services Bhd'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.

In the last year Scomi Energy Services Bhd had a loss before interest and tax, and actually shrunk its revenue by 26%, to RM348m. That makes us nervous, to say the least.

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 RM192m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of RM232m. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Scomi Energy Services Bhd (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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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