Samudera Shipping Line (SGX:S56) Seems To Use Debt Rather Sparingly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Samudera Shipping Line Ltd (SGX:S56) does carry debt. But should shareholders be worried about its use of debt?

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. 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. 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 Debt?

You can click the graphic below for the historical numbers, but it shows that Samudera Shipping Line had US$18.9m of debt in December 2021, down from US$31.4m, one year before. However, its balance sheet shows it holds US$188.7m in cash, so it actually has US$169.8m 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$160.3m due within 12 months, and liabilities of US$88.7m due beyond 12 months. Offsetting these obligations, it had cash of US$188.7m as well as receivables valued at US$135.9m due within 12 months. So it can boast US$75.6m more liquid assets than total liabilities.

It's good to see that Samudera Shipping Line has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. 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 674% 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, 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. Happily for any shareholders, Samudera Shipping Line actually produced more free cash flow than EBIT over the last three years. 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$169.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$124m, being 123% of its EBIT. The bottom line is that we do not find Samudera Shipping Line's debt levels at all concerning. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Samudera Shipping Line that you should be aware of before investing here.

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.

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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.