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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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, 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 Net Debt?

The image below, which you can click on for greater detail, shows that Shin Yang Shipping Corporation Berhad had debt of RM249.5m at the end of June 2021, a reduction from RM297.8m over a year. However, it also had RM153.8m in cash, and so its net debt is RM95.6m.

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 RM350.0m due within 12 months, and liabilities of RM99.4m due beyond 12 months. On the other hand, it had cash of RM153.8m and RM161.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM134.2m.

While this might seem like a lot, it is not so bad since Shin Yang Shipping Corporation Berhad has a market capitalization of RM449.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

While Shin Yang Shipping Corporation Berhad's low debt to EBITDA ratio of 0.78 suggests only modest use of debt, the fact that EBIT only covered the interest expense by 2.6 times last year does give us pause. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. Notably, Shin Yang Shipping Corporation Berhad made a loss at the EBIT level, last year, but improved that to positive EBIT of RM30m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shin Yang Shipping Corporation Berhad'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Happily for any shareholders, Shin Yang Shipping Corporation Berhad actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

On our analysis Shin Yang Shipping Corporation Berhad's conversion of EBIT to free cash flow should signal that it won't have too much trouble with its debt. However, our other observations weren't so heartening. In particular, interest cover gives us cold feet. When we consider all the elements mentioned above, it seems to us that Shin Yang Shipping Corporation Berhad is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. Over time, share prices tend to follow earnings per share, so if you're interested in Shin Yang Shipping Corporation Berhad, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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.

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