Here's Why Swick Mining Services (ASX:SWK) Can Manage Its Debt Responsibly
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Swick Mining Services Limited (ASX:SWK) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Swick Mining Services
What Is Swick Mining Services's Debt?
You can click the graphic below for the historical numbers, but it shows that Swick Mining Services had AU$15.0m of debt in June 2021, down from AU$20.0m, one year before. But it also has AU$15.1m in cash to offset that, meaning it has AU$108.0k net cash.
A Look At Swick Mining Services' Liabilities
The latest balance sheet data shows that Swick Mining Services had liabilities of AU$29.1m due within a year, and liabilities of AU$28.1m falling due after that. Offsetting this, it had AU$15.1m in cash and AU$23.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$18.9m.
Given Swick Mining Services has a market capitalization of AU$101.4m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Swick Mining Services boasts net cash, so it's fair to say it does not have a heavy debt load!
It was also good to see that despite losing money on the EBIT line last year, Swick Mining Services turned things around in the last 12 months, delivering and EBIT of AU$8.2m. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Swick Mining Services will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Swick Mining Services may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Swick Mining Services actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing up
While Swick Mining Services does have more liabilities than liquid assets, it also has net cash of AU$108.0k. The cherry on top was that in converted 109% of that EBIT to free cash flow, bringing in AU$9.0m. So we are not troubled with Swick Mining Services's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Swick Mining Services you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
