Does Mermaid Maritime (SGX:DU4) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Mermaid Maritime Public Company Limited (SGX:DU4) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Mermaid Maritime

What Is Mermaid Maritime's Debt?

As you can see below, Mermaid Maritime had ฿1.70b of debt at September 2021, down from ฿1.92b a year prior. On the flip side, it has ฿791.7m in cash leading to net debt of about ฿912.7m.

How Healthy Is Mermaid Maritime's Balance Sheet?

We can see from the most recent balance sheet that Mermaid Maritime had liabilities of ฿1.31b falling due within a year, and liabilities of ฿1.32b due beyond that. Offsetting these obligations, it had cash of ฿791.7m as well as receivables valued at ฿1.49b due within 12 months. So it has liabilities totalling ฿345.1m more than its cash and near-term receivables, combined.

Since publicly traded Mermaid Maritime shares are worth a total of ฿2.84b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 Mermaid Maritime 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, Mermaid Maritime reported revenue of ฿3.0b, which is a gain of 6.5%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Mermaid Maritime produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ฿103m. 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 ฿357m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Mermaid Maritime is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.