Marco Polo Marine (SGX:5LY) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Marco Polo Marine Ltd. (SGX:5LY) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Marco Polo Marine

What Is Marco Polo Marine's Debt?

The image below, which you can click on for greater detail, shows that Marco Polo Marine had debt of S$3.74m at the end of March 2022, a reduction from S$4.69m over a year. But it also has S$31.6m in cash to offset that, meaning it has S$27.9m net cash.

A Look At Marco Polo Marine's Liabilities

According to the last reported balance sheet, Marco Polo Marine had liabilities of S$19.3m due within 12 months, and liabilities of S$6.33m due beyond 12 months. Offsetting this, it had S$31.6m in cash and S$21.9m in receivables that were due within 12 months. So it can boast S$27.9m more liquid assets than total liabilities.

This excess liquidity suggests that Marco Polo Marine is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Marco Polo Marine boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Marco Polo Marine turned things around in the last 12 months, delivering and EBIT of S$8.0m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Marco Polo Marine can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Marco Polo Marine has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Marco Polo Marine actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Marco Polo Marine has net cash of S$27.9m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of S$9.1m, being 114% of its EBIT. So we don't think Marco Polo Marine's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Marco Polo Marine (1 shouldn't be ignored!) that you should be aware of before investing here.

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.