We Think CH Offshore (SGX:C13) Has A Fair Chunk Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, CH Offshore Ltd. (SGX:C13) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for CH Offshore

What Is CH Offshore's Net Debt?

As you can see below, at the end of December 2020, CH Offshore had US$10.6m of debt, up from US$8.73m a year ago. Click the image for more detail. On the flip side, it has US$3.19m in cash leading to net debt of about US$7.44m.

How Healthy Is CH Offshore's Balance Sheet?

We can see from the most recent balance sheet that CH Offshore had liabilities of US$13.3m falling due within a year, and liabilities of US$7.04m due beyond that. On the other hand, it had cash of US$3.19m and US$11.4m worth of receivables due within a year. So it has liabilities totalling US$5.74m more than its cash and near-term receivables, combined.

This deficit isn't so bad because CH Offshore is worth US$22.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year CH Offshore had a loss before interest and tax, and actually shrunk its revenue by 9.8%, to US$19m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months CH Offshore produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$9.0m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$8.4m of cash over the last year. So suffice it to say we consider the stock very risky. 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. Be aware that CH Offshore is showing 3 warning signs in our investment analysis , and 2 of those are a bit concerning...

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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