Is CH Offshore (SGX:C13) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, CH Offshore Ltd. (SGX:C13) does carry debt. But should shareholders be worried about its use of debt?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for CH Offshore

How Much Debt Does CH Offshore Carry?

You can click the graphic below for the historical numbers, but it shows that CH Offshore had US$6.49m of debt in June 2023, down from US$8.01m, one year before. However, it does have US$7.31m in cash offsetting this, leading to net cash of US$819.0k.

How Strong Is CH Offshore's Balance Sheet?

We can see from the most recent balance sheet that CH Offshore had liabilities of US$11.4m falling due within a year, and liabilities of US$2.99m due beyond that. Offsetting this, it had US$7.31m in cash and US$6.29m in receivables that were due within 12 months. So its liabilities total US$819.0k more than the combination of its cash and short-term receivables.

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$41.1m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, CH Offshore also has more cash than debt, so we're pretty confident it can manage its debt safely. 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.

Over 12 months, CH Offshore saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

So How Risky Is CH Offshore?

While CH Offshore lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$876k. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for CH Offshore you should know about.

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.