David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Singamas Container Holdings Limited (HKG:716) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Singamas Container Holdings

How Much Debt Does Singamas Container Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Singamas Container Holdings had US$308.5m of debt in June 2019, down from US$439.2m, one year before. However, it also had US$59.3m in cash, and so its net debt is US$249.3m.

A Look At Singamas Container Holdings's Liabilities

The latest balance sheet data shows that Singamas Container Holdings had liabilities of US$803.4m due within a year, and liabilities of US$37.3m falling due after that. On the other hand, it had cash of US$59.3m and US$141.8m worth of receivables due within a year. So its liabilities total US$639.6m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$299.1m 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 definitely think shareholders need to watch this one closely. At the end of the day, Singamas Container Holdings would probably need a major re-capitalization if its creditors were to demand repayment.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (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).