The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Samudera Shipping Line Ltd (SGX:S56) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Samudera Shipping Line's Net Debt?
The image below, which you can click on for greater detail, shows that Samudera Shipping Line had debt of US$28.8m at the end of June 2021, a reduction from US$31.3m over a year. However, its balance sheet shows it holds US$108.6m in cash, so it actually has US$79.8m net cash.
How Strong Is Samudera Shipping Line's Balance Sheet?
According to the last reported balance sheet, Samudera Shipping Line had liabilities of US$90.1m due within 12 months, and liabilities of US$69.4m due beyond 12 months. On the other hand, it had cash of US$108.6m and US$86.8m worth of receivables due within a year. So it actually has US$35.9m more liquid assets than total liabilities.
This surplus suggests that Samudera Shipping Line is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Samudera Shipping Line boasts net cash, so it's fair to say it does not have a heavy debt load!
Even more impressive was the fact that Samudera Shipping Line grew its EBIT by 383% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Samudera Shipping Line'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Samudera Shipping Line 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. 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.
While we empathize with investors who find debt concerning, you should keep in mind that Samudera Shipping Line has net cash of US$79.8m, as well as more liquid assets than liabilities. The cherry on top was that in converted 152% of that EBIT to free cash flow, bringing in US$63m. The bottom line is that we do not find Samudera Shipping Line's debt levels at all concerning. 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. We've identified 3 warning signs with Samudera Shipping Line , and understanding them should be part of your investment process.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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.
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