These 4 Measures Indicate That Beng Kuang Marine (SGX:BEZ) Is Using Debt Reasonably Well

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.' 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. Importantly, Beng Kuang Marine Limited (SGX:BEZ) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Beng Kuang Marine

What Is Beng Kuang Marine's Debt?

The image below, which you can click on for greater detail, shows that Beng Kuang Marine had debt of S$12.0m at the end of December 2023, a reduction from S$20.5m over a year. However, its balance sheet shows it holds S$13.0m in cash, so it actually has S$946.0k net cash.

How Strong Is Beng Kuang Marine's Balance Sheet?

We can see from the most recent balance sheet that Beng Kuang Marine had liabilities of S$47.5m falling due within a year, and liabilities of S$3.66m due beyond that. On the other hand, it had cash of S$13.0m and S$30.8m worth of receivables due within a year. So it has liabilities totalling S$7.35m more than its cash and near-term receivables, combined.

Given Beng Kuang Marine has a market capitalization of S$42.8m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Beng Kuang Marine also has more cash than debt, so we're pretty confident it can manage its debt safely.

We also note that Beng Kuang Marine improved its EBIT from a last year's loss to a positive S$8.2m. There's no doubt that we learn most about debt from the balance sheet. But it is Beng Kuang Marine'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. Beng Kuang Marine may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last year, Beng Kuang Marine's free cash flow amounted to 39% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Beng Kuang Marine does have more liabilities than liquid assets, it also has net cash of S$946.0k. So we don't have any problem with Beng Kuang Marine's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Beng Kuang Marine has 3 warning signs we think 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com