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.’ 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 can see that Havila Shipping ASA (OB:HAVI) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is Havila Shipping’s Net Debt?
The chart below, which you can click on for greater detail, shows that Havila Shipping had kr4.12b in debt in June 2019; about the same as the year before. On the flip side, it has kr100.4m in cash leading to net debt of about kr4.02b.
How Strong Is Havila Shipping’s Balance Sheet?
We can see from the most recent balance sheet that Havila Shipping had liabilities of kr172.9m falling due within a year, and liabilities of kr4.26b due beyond that. Offsetting these obligations, it had cash of kr100.4m as well as receivables valued at kr223.2m due within 12 months. So it has liabilities totalling kr4.11b more than its cash and near-term receivables, combined.
This deficit casts a shadow over the kr77.5m company, like a colossus towering over mere mortals. So we’d watch its balance sheet closely, without a doubt At the end of the day, Havila Shipping would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Havila Shipping’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 Havila Shipping managed to grow its revenue by 13%, to kr651m. We usually like to see faster growth from unprofitable companies, but each to their own.
Over the last twelve months Havila Shipping produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable kr156m at the EBIT level. Reflecting on this and the significant total liabilities, it’s hard to know what to say about the stock because of our intense dis-affinity for it. 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 burned through kr3.0m in the last year. So we consider this a high risk stock, and we’re worried its share price could sink faster than than a dingy with a great white shark attacking it. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we’re providing readers this interactive graph showing how Havila Shipping’s profit, revenue, and operating cashflow have changed over the last few years.
Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.