CH Offshore (SGX:C13) Seems To Use Debt Quite Sensibly

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 CH Offshore Ltd. (SGX:C13) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for CH Offshore

What Is CH Offshore's Debt?

The image below, which you can click on for greater detail, shows that CH Offshore had debt of US$5.63m at the end of June 2024, a reduction from US$6.49m over a year. But on the other hand it also has US$7.32m in cash, leading to a US$1.70m net cash position.

How Healthy Is CH Offshore's Balance Sheet?

According to the last reported balance sheet, CH Offshore had liabilities of US$16.4m due within 12 months, and liabilities of US$565.0k due beyond 12 months. Offsetting these obligations, it had cash of US$7.32m as well as receivables valued at US$9.80m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that CH Offshore's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$28.0m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that CH Offshore has more cash than debt is arguably a good indication that it can manage its debt safely.

We also note that CH Offshore improved its EBIT from a last year's loss to a positive US$288k. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since CH 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While CH Offshore has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, CH Offshore actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that CH Offshore has net cash of US$1.70m, as well as more liquid assets than liabilities. The cherry on top was that in converted 197% of that EBIT to free cash flow, bringing in US$566k. So we are not troubled with CH Offshore's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for CH Offshore that you should be aware of before investing here.

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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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.