Accuracy Shipping (NSE:ACCURACY) Takes On Some Risk With Its Use Of Debt
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.' 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. Importantly, Accuracy Shipping Limited (NSE:ACCURACY) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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 think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Accuracy Shipping
What Is Accuracy Shipping's Net Debt?
As you can see below, at the end of March 2019, Accuracy Shipping had ₹534.3m of debt, up from ₹501.9m a year ago. Click the image for more detail. However, it does have ₹16.4m in cash offsetting this, leading to net debt of about ₹517.8m.
How Strong Is Accuracy Shipping's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Accuracy Shipping had liabilities of ₹587.2m due within 12 months and liabilities of ₹359.6m due beyond that. Offsetting these obligations, it had cash of ₹16.4m as well as receivables valued at ₹997.3m due within 12 months. So it can boast ₹66.9m more liquid assets than total liabilities.
This surplus suggests that Accuracy Shipping has a conservative balance sheet, and could probably eliminate its debt without much difficulty.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).