Does Scomi Energy Services Bhd (KLSE:SCOMIES) use debt in a risky way?
Warren Buffett said: “Volatility is far from synonymous with risk. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We notice that Scomi Energy Services Bhd (KLSE:SCOMIES) has debt on its balance sheet. But does this debt worry shareholders?
When is debt a problem?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.
Check out our latest analysis for Scomi Energy Services Bhd
How much debt does Scomi Energy Services Bhd have?
As you can see below, Scomi Energy Services Bhd had a debt of RM133.5 million, as of September 2021, which is about the same as the previous year. You can click on the graph for more details. However, he has RM61.7 million in cash to offset this, resulting in a net debt of around RM71.7 million.
A look at the responsibilities of Scomi Energy Services Bhd
According to the latest published balance sheet, Scomi Energy Services Bhd had liabilities of RM308.1 million due within 12 months and liabilities of RM7.94 million due beyond 12 months. As compensation for these obligations, it had cash of RM61.7 million and receivables valued at RM83.2 million due within 12 months. Thus, its liabilities total RM171.1 million more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the company itself, at RM32.8 million, like a child struggling under the weight of a huge backpack full of books, his sports equipment and a trumpet. We would therefore be watching his balance sheet closely, no doubt. Ultimately, Scomi Energy Services Bhd would likely need a major recapitalization if its creditors were to demand repayment. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the profits of Scomi Energy Services Bhd that will influence the balance sheet in the future. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Over the past year, Scomi Energy Services Bhd posted a loss before interest and tax and actually reduced its revenue by 13% to RM243 million. We would much rather see growth.
Not only has Scomi Energy Services Bhd’s turnover fallen over the past twelve months, but it has also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable RM30 million in EBIT. Combining this information with the significant liabilities we have already discussed makes us very hesitant about this stock, to say the least. That said, it is possible that the company will change course. But we think that’s unlikely as it lacks liquid assets and posted a loss of RM51m last year. We therefore believe that this title is quite risky. We prefer to pass. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 3 warning signs for Scomi Energy Services Bhd you should be aware of, and 2 of them are significant.
If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.