We Think Mermaid Maritime (SGX:DU4) Has A Fair Chunk Of Debt

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. We note that Mermaid Maritime Public Company Limited (SGX:DU4) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Mermaid Maritime

How Much Debt Does Mermaid Maritime Carry?

You can click the graphic below for the historical numbers, but it shows that Mermaid Maritime had ฿1.60b of debt in March 2022, down from ฿1.69b, one year before. However, it does have ฿329.0m in cash offsetting this, leading to net debt of about ฿1.27b.

How Strong Is Mermaid Maritime's Balance Sheet?

We can see from the most recent balance sheet that Mermaid Maritime had liabilities of ฿2.46b falling due within a year, and liabilities of ฿1.12b due beyond that. Offsetting these obligations, it had cash of ฿329.0m as well as receivables valued at ฿2.54b due within 12 months. So it has liabilities totalling ฿714.5m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Mermaid Maritime has a market capitalization of ฿3.21b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Mermaid Maritime 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 Mermaid Maritime wasn't profitable at an EBIT level, but managed to grow its revenue by 76%, to ฿4.4b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Mermaid Maritime managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping ฿594m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ฿454m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Case in point: We've spotted 4 warning signs for Mermaid Maritime you should be aware of, and 2 of them can't be ignored.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.