Is Beng Kuang Marine (SGX: BEZ) using too much debt?
Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. It’s 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 Beng Kuang Marine Limited (SGX: BEZ) uses debt in its business. But should shareholders be concerned about its use of debt?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. Ultimately, if the company cannot 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, debt can be an important tool in businesses, especially capital intensive businesses. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest analysis for Beng Kuang Marine
What is the debt of Beng Kuang Marine?
You can click on the graph below for historical figures, but it shows Beng Kuang Marine owed S $ 25.2 million in debt as of December 2020, up from S $ 27.9 million a year earlier. However, it has S $ 4.88 million offsetting this, which leads to net debt of around S $ 20.3 million.
A look at the responsibilities of Beng Kuang Marine
We can see from the most recent balance sheet that Beng Kuang Marine had S $ 50.7 million liabilities due within one year and S $ 10.6 million liabilities owed beyond that. On the other hand, it had S $ 4.88 million in cash and S $ 27.7 million in receivables due within one year. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by S $ 28.7 million.
This deficit casts a shadow over the S $ 5.81 million society as a towering colossus of mere mortals. So we would be watching its record closely, without a doubt. After all, Beng Kuang Marine 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 Beng Kuang Marine will need income to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Over 12 months, Beng Kuang Marine recorded a loss in EBIT and saw its revenue drop to S $ 43 million, a decrease of 27%. It makes us nervous, to say the least.
While Beng Kuang Marine’s declining income is about as heartwarming as a wet blanket, its earnings before interest and taxes (EBIT) can be said to be even less attractive. Its loss of EBIT was S $ 12 million. The combination of this information with the significant liabilities that we have already mentioned makes us very hesitant to say the least about this stock. Of course, he may be able to improve his situation with a little luck and a good execution. Still, we wouldn’t bet on it given that he has lost S $ 15million in the past 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. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. To do this, you need to know the 2 warning signs we spotted with Beng Kuang Marine.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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