Is Shin Yang Shipping Corporation Berhad (KLSE:SYSCORP) Using Too Much Debt?

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 Shin Yang Shipping Corporation Berhad (KLSE:SYSCORP) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View 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 RM266.7m at the end of December 2020, a reduction from RM314.6m over a year. On the flip side, it has RM133.7m in cash leading to net debt of about RM133.1m.

How Strong Is Shin Yang Shipping Corporation Berhad's Balance Sheet?

The latest balance sheet data shows that Shin Yang Shipping Corporation Berhad had liabilities of RM356.7m due within a year, and liabilities of RM106.4m falling due after that. Offsetting these obligations, it had cash of RM133.7m as well as receivables valued at RM149.6m due within 12 months. So its liabilities total RM179.8m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Shin Yang Shipping Corporation Berhad is worth RM467.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

In the last year Shin Yang Shipping Corporation Berhad had a loss before interest and tax, and actually shrunk its revenue by 11%, to RM565m. That's not what we would hope to see.

Caveat Emptor

While Shin Yang Shipping Corporation Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable RM89m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of RM103m into a profit. In the meantime, we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Shin Yang Shipping Corporation Berhad (at least 1 which makes us a bit uncomfortable) , 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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