Is Scomi Energy Services Bhd (KLSE:SCOMIES) Weighed On By Its Debt Load?

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.' 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 note that Scomi Energy Services Bhd (KLSE:SCOMIES) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Scomi Energy Services Bhd

What Is Scomi Energy Services Bhd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Scomi Energy Services Bhd had RM136.2m of debt in September 2020, down from RM185.8m, one year before. However, it does have RM57.5m in cash offsetting this, leading to net debt of about RM78.7m.

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

Zooming in on the latest balance sheet data, we can see that Scomi Energy Services Bhd had liabilities of RM293.8m due within 12 months and liabilities of RM14.3m due beyond that. On the other hand, it had cash of RM57.5m and RM146.1m worth of receivables due within a year. So it has liabilities totalling RM104.5m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the RM46.8m 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Scomi Energy Services Bhd's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Scomi Energy Services Bhd had a loss before interest and tax, and actually shrunk its revenue by 20%, to RM392m. 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 RM165m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of RM208m. In the meantime, we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. 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 1 of them is significant.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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