Is CH Offshore (SGX:C13) Weighed On By Its Debt Load?

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?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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

What Is CH Offshore's Net Debt?

As you can see below, CH Offshore had US$7.09m of debt at December 2022, down from US$9.19m a year prior. However, its balance sheet shows it holds US$7.32m in cash, so it actually has US$232.0k net cash.

A Look At CH Offshore's Liabilities

According to the last reported balance sheet, CH Offshore had liabilities of US$9.97m due within 12 months, and liabilities of US$3.71m due beyond 12 months. Offsetting these obligations, it had cash of US$7.32m as well as receivables valued at US$8.68m due within 12 months. So it actually has US$2.32m more liquid assets than total liabilities.

This surplus suggests that CH Offshore has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, CH Offshore boasts net cash, so it's fair to say it does not have a heavy debt load! 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 CH Offshore 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, CH Offshore reported revenue of US$19m, which is a gain of 20%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is CH Offshore?

Although CH Offshore had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$1.7m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. To that end, you should learn about the 2 warning signs we've spotted with CH Offshore (including 1 which doesn't sit too well with us) .

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.