Is COSCO Shipping International (Singapore) (SGX:F83) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that COSCO Shipping International (Singapore) Co., Ltd. (SGX:F83) does use debt in its business. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for COSCO Shipping International (Singapore)

How Much Debt Does COSCO Shipping International (Singapore) Carry?

As you can see below, at the end of December 2020, COSCO Shipping International (Singapore) had S$244.2m of debt, up from S$211.3m a year ago. Click the image for more detail. However, it does have S$79.0m in cash offsetting this, leading to net debt of about S$165.2m.

A Look At COSCO Shipping International (Singapore)'s Liabilities

According to the last reported balance sheet, COSCO Shipping International (Singapore) had liabilities of S$89.2m due within 12 months, and liabilities of S$384.3m due beyond 12 months. On the other hand, it had cash of S$79.0m and S$38.8m worth of receivables due within a year. So its liabilities total S$355.6m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because COSCO Shipping International (Singapore) is worth S$705.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

COSCO Shipping International (Singapore) shareholders face the double whammy of a high net debt to EBITDA ratio (6.0), and fairly weak interest coverage, since EBIT is just 0.44 times the interest expense. The debt burden here is substantial. Worse, COSCO Shipping International (Singapore)'s EBIT was down 77% over the last year. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. When analysing debt levels, the balance sheet is the obvious place to start. But it is COSCO Shipping International (Singapore)'s earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Looking at the most recent three years, COSCO Shipping International (Singapore) recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

On the face of it, COSCO Shipping International (Singapore)'s interest cover left us tentative about the stock, and its EBIT growth rate was no more enticing than the one empty restaurant on the busiest night of the year. Having said that, its ability to handle its total liabilities isn't such a worry. We're quite clear that we consider COSCO Shipping International (Singapore) to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. 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 2 warning signs for COSCO Shipping International (Singapore) you should be aware of, and 1 of them doesn't sit too well with us.

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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