Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Mermaid Maritime Public Company Limited (SGX:DU4) does carry debt. But is this debt a concern to shareholders?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Mermaid Maritime Carry?
As you can see below, at the end of September 2020, Mermaid Maritime had ฿1.92b of debt, up from ฿1.80b a year ago. Click the image for more detail. However, because it has a cash reserve of ฿1.80b, its net debt is less, at about ฿129.1m.
A Look At Mermaid Maritime's Liabilities
We can see from the most recent balance sheet that Mermaid Maritime had liabilities of ฿1.14b falling due within a year, and liabilities of ฿1.57b due beyond that. Offsetting these obligations, it had cash of ฿1.80b as well as receivables valued at ฿927.1m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
Having regard to Mermaid Maritime's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ฿2.10b company is short on cash, but still worth keeping an eye on the balance sheet. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Mermaid Maritime's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Mermaid Maritime made a loss at the EBIT level, and saw its revenue drop to ฿2.8b, which is a fall of 16%. We would much prefer see growth.
While Mermaid Maritime's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ฿1.1b. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. 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 Mermaid Maritime is showing 2 warning signs in our investment analysis , 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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