Is Shin Yang Shipping Corporation Berhad (KLSE:SYSCORP) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Shin Yang Shipping Corporation Berhad (KLSE:SYSCORP) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Shin Yang Shipping Corporation Berhad

What Is Shin Yang Shipping Corporation Berhad's Debt?

The image below, which you can click on for greater detail, shows that Shin Yang Shipping Corporation Berhad had debt of RM209.3m at the end of March 2022, a reduction from RM259.5m over a year. However, it does have RM253.0m in cash offsetting this, leading to net cash of RM43.7m.

A Look At Shin Yang Shipping Corporation Berhad's Liabilities

According to the last reported balance sheet, Shin Yang Shipping Corporation Berhad had liabilities of RM350.5m due within 12 months, and liabilities of RM98.7m due beyond 12 months. On the other hand, it had cash of RM253.0m and RM181.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM14.1m.

Given Shin Yang Shipping Corporation Berhad has a market capitalization of RM471.3m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Shin Yang Shipping Corporation Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Shin Yang Shipping Corporation Berhad turned things around in the last 12 months, delivering and EBIT of RM79m. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Shin Yang Shipping Corporation Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Shin Yang Shipping Corporation Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Shin Yang Shipping Corporation Berhad actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

We could understand if investors are concerned about Shin Yang Shipping Corporation Berhad's liabilities, but we can be reassured by the fact it has has net cash of RM43.7m. And it impressed us with free cash flow of RM188m, being 239% of its EBIT. So is Shin Yang Shipping Corporation Berhad's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Shin Yang Shipping Corporation Berhad's earnings per share history for free.

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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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.