Warren Buffett said: “Volatility is far from synonymous with risk”. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that Scomi Energy Services Bhd (KLSE: SCOMIES) uses debt in its activity. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider both liquidity and debt levels.
Check out our latest review for Scomi Energy Services Bhd
What is the debt of Scomi Energy Services Bhd?
As you can see below, at the end of June 2021, Scomi Energy Services Bhd had a debt of RM 131.9 million, up from RM 124.6 million a year ago. Click on the image for more details. However, he has 58.5 million RM in cash offsetting this, which leads to a net debt of around 73.5 million RM.
How strong is Scomi Energy Services Bhd’s balance sheet?
We can see from the most recent balance sheet that Scomi Energy Services Bhd had liabilities of RM 289.0 million due within one year and liabilities of RM 7.92 million due beyond. In compensation for these obligations, he had cash of RM 58.5 million as well as receivables valued at RM 88.8 million due within 12 months. So he has a liability totaling RM 149.7 million more than his cash and short-term receivables combined.
This deficit casts a shadow over the RM37.5million society like a towering colossus of mere mortals. We therefore believe that shareholders should watch it closely. After all, Scomi Energy Services Bhd would likely need a major recapitalization if it were to pay its creditors today. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; since Scomi Energy Services Bhd will need income to repay this debt. So if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.
Over 12 months, Scomi Energy Services Bhd recorded a loss in EBIT level and saw its turnover fall to RM 308 million, a decrease of 27%. To be frank, that doesn’t bode well.
Not only has Scomi Energy Services Bhd’s turnover declined over the past twelve months, but it has also generated negative profit before interest and taxes (EBIT). Indeed, he lost a very considerable amount of RM12 million in EBIT level. The combination of this information with the significant liabilities that we have already mentioned makes us very hesitant about this stock, to say the least. Of course, he may be able to improve his situation with a little luck and a good execution. Nonetheless, we wouldn’t bet on it given that it has lost 212 million RM in the last twelve months and doesn’t have a lot of cash. So while it is unwise to assume that the business will fail, we believe it is risky. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. Note that Scomi Energy Services Bhd displays 2 warning signs in our investment analysis , you must know…
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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