Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Neptune Marine Services Limited (ASX:NMS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Neptune Marine Services Carry?
The image below, which you can click on for greater detail, shows that at March 2019 Neptune Marine Services had debt of AU$2.35m, up from AU$235.0k in one year. But it also has AU$13.0m in cash to offset that, meaning it has AU$10.6m net cash.
A Look At Neptune Marine Services's Liabilities
The latest balance sheet data shows that Neptune Marine Services had liabilities of AU$26.0m due within a year, and liabilities of AU$537.0k falling due after that. On the other hand, it had cash of AU$13.0m and AU$22.7m worth of receivables due within a year. So it actually has AU$9.15m more liquid assets than total liabilities.
This luscious liquidity implies that Neptune Marine Services's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Simply put, the fact that Neptune Marine Services has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Neptune Marine 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.
Over 12 months, Neptune Marine Services reported revenue of AU$84m, which is a gain of 25%. With any luck the company will be able to grow its way to profitability.
So How Risky Is Neptune Marine Services?
Although Neptune Marine Services had negative earnings before interest and tax (EBIT) over the last twelve months, it generated positive free cash flow of AU$4.9m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We also take heart from the solid 25% revenue growth in 12 months; undoubtedly a good sign. That growth could mean this is one stock well worth watching. For riskier companies like Neptune Marine Services I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.