Samudera Shipping Line (SGX:S56) Seems To Use Debt Quite Sensibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Samudera Shipping Line

How Much Debt Does Samudera Shipping Line Carry?

The image below, which you can click on for greater detail, shows that at June 2023 Samudera Shipping Line had debt of US$27.5m, up from US$26.1m in one year. But it also has US$312.6m in cash to offset that, meaning it has US$285.1m net cash.

How Healthy Is Samudera Shipping Line's Balance Sheet?

The latest balance sheet data shows that Samudera Shipping Line had liabilities of US$156.3m due within a year, and liabilities of US$157.6m falling due after that. Offsetting these obligations, it had cash of US$312.6m as well as receivables valued at US$102.4m due within 12 months. So it can boast US$100.9m more liquid assets than total liabilities.

This excess liquidity is a great indication that Samudera Shipping Line's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Samudera Shipping Line boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Samudera Shipping Line's load is not too heavy, because its EBIT was down 22% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Happily for any shareholders, Samudera Shipping Line actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Samudera Shipping Line has US$285.1m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$317m, being 118% of its EBIT. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Samudera Shipping Line that you should be aware of before investing here.

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. 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.