Is Beng Kuang Marine (SGX:BEZ) Using Too Much Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Beng Kuang Marine Limited (SGX:BEZ) does use debt in its business. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Beng Kuang Marine

What Is Beng Kuang Marine's Debt?

You can click the graphic below for the historical numbers, but it shows that Beng Kuang Marine had S$25.2m of debt in December 2020, down from S$27.9m, one year before. However, it does have S$4.88m in cash offsetting this, leading to net debt of about S$20.3m.

A Look At Beng Kuang Marine's Liabilities

We can see from the most recent balance sheet that Beng Kuang Marine had liabilities of S$50.7m falling due within a year, and liabilities of S$10.6m due beyond that. On the other hand, it had cash of S$4.88m and S$27.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$28.7m.

This deficit casts a shadow over the S$5.81m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Beng Kuang Marine would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Beng Kuang Marine 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, Beng Kuang Marine made a loss at the EBIT level, and saw its revenue drop to S$43m, which is a fall of 27%. That makes us nervous, to say the least.

Caveat Emptor

While Beng Kuang Marine's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping S$12m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost S$15m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Beng Kuang Marine .

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.

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