Is CH Offshore (SGX:C13) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies CH Offshore Ltd. (SGX:C13) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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, 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for CH Offshore

What Is CH Offshore's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 CH Offshore had US$9.98m of debt, an increase on US$8.00m, over one year. However, because it has a cash reserve of US$3.09m, its net debt is less, at about US$6.89m.

How Strong Is CH Offshore's Balance Sheet?

According to the last reported balance sheet, CH Offshore had liabilities of US$10.4m due within 12 months, and liabilities of US$7.16m due beyond 12 months. On the other hand, it had cash of US$3.09m and US$10.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$4.30m.

Given CH Offshore has a market capitalization of US$36.3m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is CH Offshore'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.

Over 12 months, CH Offshore made a loss at the EBIT level, and saw its revenue drop to US$14m, which is a fall of 42%. That makes us nervous, to say the least.

Caveat Emptor

Not only did CH Offshore's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$9.1m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$10m of cash over the last year. So in short it's a really risky stock. 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 CH Offshore has 4 warning signs (and 3 which can't be ignored) we think you should know about.

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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