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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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.
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.
See 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$44.5m of debt in June 2019, down from US$53.2m, one year before. However, it does have US$40.0m in cash offsetting this, leading to net debt of about US$4.54m.
A Look At Samudera Shipping Line's Liabilities
We can see from the most recent balance sheet that Samudera Shipping Line had liabilities of US$60.6m falling due within a year, and liabilities of US$43.3m due beyond that. Offsetting these obligations, it had cash of US$40.0m as well as receivables valued at US$73.2m due within 12 months. So it actually has US$9.31m more liquid assets than total liabilities.
This short term liquidity is a sign that Samudera Shipping Line could probably pay off its debt with ease, as its balance sheet is far from stretched.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
Looking at its net debt to EBITDA of 0.27 and interest cover of 5.5 times, it seems to us that Samudera Shipping Line is probably using debt in a pretty reasonable way. So we'd recommend keeping a close eye on the impact financing costs are having on the business. It is well worth noting that Samudera Shipping Line's EBIT shot up like bamboo after rain, gaining 66% in the last twelve months. That'll make it easier to manage its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Samudera Shipping Line's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.