Is Scomi Energy Services Bhd (KLSE:SCOMIES) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Scomi Energy Services Bhd (KLSE:SCOMIES) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Scomi Energy Services Bhd

How Much Debt Does Scomi Energy Services Bhd Carry?

As you can see below, Scomi Energy Services Bhd had RM133.5m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have RM61.7m in cash offsetting this, leading to net debt of about RM71.7m.

A Look At Scomi Energy Services Bhd's Liabilities

According to the last reported balance sheet, Scomi Energy Services Bhd had liabilities of RM308.1m due within 12 months, and liabilities of RM7.94m due beyond 12 months. Offsetting these obligations, it had cash of RM61.7m as well as receivables valued at RM83.2m due within 12 months. So its liabilities total RM171.1m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the RM32.8m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. 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 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 13%, to RM243m. We would much prefer see growth.

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 RM30m 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. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of RM51m 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Scomi Energy Services Bhd you should be aware of, and 2 of them are significant.

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. 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.