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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Scanship Holding ASA (OB:SSHIP) does carry 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Scanship Holding
How Much Debt Does Scanship Holding Carry?
As you can see below, at the end of June 2019, Scanship Holding had kr25.3m of debt, up from kr2.90m a year ago. Click the image for more detail. However, because it has a cash reserve of kr9.70m, its net debt is less, at about kr15.6m.
How Strong Is Scanship Holding's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Scanship Holding had liabilities of kr116.8m due within 12 months and liabilities of kr19.2m due beyond that. Offsetting these obligations, it had cash of kr9.70m as well as receivables valued at kr155.5m due within 12 months. So it actually has kr29.2m more liquid assets than total liabilities.
Having regard to Scanship Holding's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the kr1.65b company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, Scanship Holding has virtually no net debt, so it's fair to say it does not have a heavy debt load!
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). 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).