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

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.' 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 note that Beng Kuang Marine Limited (SGX:BEZ) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Beng Kuang Marine

What Is Beng Kuang Marine's Debt?

As you can see below, at the end of June 2021, Beng Kuang Marine had S$27.1m of debt, up from S$25.4m a year ago. Click the image for more detail. On the flip side, it has S$4.81m in cash leading to net debt of about S$22.3m.

How Strong Is Beng Kuang Marine's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Beng Kuang Marine had liabilities of S$60.6m due within 12 months and liabilities of S$5.80m due beyond that. On the other hand, it had cash of S$4.81m and S$33.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$28.2m.

This deficit casts a shadow over the S$16.4m 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. 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 Beng Kuang Marine will need earnings to service that debt. 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.

Over 12 months, Beng Kuang Marine made a loss at the EBIT level, and saw its revenue drop to S$49m, which is a fall of 8.5%. We would much prefer see growth.

Caveat Emptor

Importantly, Beng Kuang Marine had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping S$11m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of S$16m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be 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. Be aware that Beng Kuang Marine is showing 4 warning signs in our investment analysis , and 1 of those is concerning...

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. 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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