The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Seatrium Limited (SGX:5E2) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

How Much Debt Does Seatrium Carry?

As you can see below, Seatrium had S$3.44b of debt at June 2024, down from S$3.72b a year prior. However, it also had S$1.64b in cash, and so its net debt is S$1.81b.

How Healthy Is Seatrium's Balance Sheet?

The latest balance sheet data shows that Seatrium had liabilities of S$7.76b due within a year, and liabilities of S$3.97b falling due after that. On the other hand, it had cash of S$1.64b and S$6.51b worth of receivables due within a year. So it has liabilities totalling S$3.57b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Seatrium is worth S$6.71b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Seatrium's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Seatrium wasn't profitable at an EBIT level, but managed to grow its revenue by 125%, to S$8.4b. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

While we can certainly appreciate Seatrium's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at S$75m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled S$435m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Seatrium's profit, revenue, and operating cashflow have changed over the last few years.