Health Check: How Prudently Does Eidesvik Offshore (OB:EIOF) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Eidesvik Offshore ASA (OB:EIOF) 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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Eidesvik Offshore

What Is Eidesvik Offshore's Net Debt?

The chart below, which you can click on for greater detail, shows that Eidesvik Offshore had kr2.38b in debt in December 2020; about the same as the year before. However, because it has a cash reserve of kr685.2m, its net debt is less, at about kr1.70b.

How Healthy Is Eidesvik Offshore's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Eidesvik Offshore had liabilities of kr349.2m due within 12 months and liabilities of kr2.27b due beyond that. Offsetting these obligations, it had cash of kr685.2m as well as receivables valued at kr166.6m due within 12 months. So it has liabilities totalling kr1.76b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the kr246.7m 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, Eidesvik Offshore would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Eidesvik Offshore 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.

Over 12 months, Eidesvik Offshore made a loss at the EBIT level, and saw its revenue drop to kr510m, which is a fall of 19%. We would much prefer see growth.

Caveat Emptor

Not only did Eidesvik Offshore'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 kr97m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost kr124m in the last year. So we're not very excited about owning this stock. Its too risky for us. 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. For instance, we've identified 3 warning signs for Eidesvik Offshore (1 is significant) you should be aware of.

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. 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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