Is Samudera Shipping Line (SGX:S56) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Samudera Shipping Line Ltd (SGX:S56) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Samudera Shipping Line

What Is Samudera Shipping Line's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Samudera Shipping Line had US$29.6m of debt in December 2020, down from US$37.3m, one year before. But on the other hand it also has US$80.8m in cash, leading to a US$51.3m net cash position.

How Strong Is Samudera Shipping Line's Balance Sheet?

The latest balance sheet data shows that Samudera Shipping Line had liabilities of US$70.7m due within a year, and liabilities of US$74.2m falling due after that. Offsetting these obligations, it had cash of US$80.8m as well as receivables valued at US$70.7m due within 12 months. So it can boast US$6.72m more liquid assets than total liabilities.

This surplus suggests that Samudera Shipping Line has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Samudera Shipping Line has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Samudera Shipping Line grew its EBIT by 175% last year, which is an impressive improvement. That boost will make it even easier to pay down debt 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 Samudera Shipping Line 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Samudera Shipping Line may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Samudera Shipping Line actually produced more free cash flow than EBIT. 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 Samudera Shipping Line has net cash of US$51.3m, as well as more liquid assets than liabilities. The cherry on top was that in converted 200% of that EBIT to free cash flow, bringing in US$37m. So we don't think Samudera Shipping Line's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Samudera Shipping Line you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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