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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 Samko Timber Limited (SGX:E6R) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Samko Timber
What Is Samko Timber's Net Debt?
As you can see below, at the end of March 2019, Samko Timber had Rp1.27t of debt, up from Rp864.4b a year ago. Click the image for more detail. However, it also had Rp29.9b in cash, and so its net debt is Rp1.24t.
A Look At Samko Timber's Liabilities
We can see from the most recent balance sheet that Samko Timber had liabilities of Rp1.67t falling due within a year, and liabilities of Rp371.9b due beyond that. On the other hand, it had cash of Rp29.9b and Rp494.6b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by Rp1.51t.
The deficiency here weighs heavily on the Rp614.5b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt At the end of the day, Samko Timber would probably need a major re-capitalization if its creditors were to demand repayment.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.