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. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies CEI Limited (SGX:AVV) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for CEI
What Is CEI's Net Debt?
You can click the graphic below for the historical numbers, but it shows that CEI had S$6.01m of debt in December 2019, down from S$7.52m, one year before. But on the other hand it also has S$8.17m in cash, leading to a S$2.16m net cash position.
A Look At CEI's Liabilities
We can see from the most recent balance sheet that CEI had liabilities of S$27.3m falling due within a year, and liabilities of S$4.35m due beyond that. On the other hand, it had cash of S$8.17m and S$26.5m worth of receivables due within a year. So it actually has S$3.01m more liquid assets than total liabilities.
This surplus suggests that CEI has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, CEI boasts net cash, so it's fair to say it does not have a heavy debt load!
But the other side of the story is that CEI saw its EBIT decline by 8.9% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since CEI 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.