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. Importantly, Seatrium Limited (SGX:5E2) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Seatrium's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Seatrium had S$3.44b of debt in June 2024, down from S$3.72b, one year before. However, because it has a cash reserve of S$1.64b, its net debt is less, at about S$1.81b.

A Look At Seatrium's Liabilities

The latest balance sheet data shows that Seatrium had liabilities of S$7.76b due within a year, and liabilities of S$3.97b falling due after that. Offsetting these obligations, it had cash of S$1.64b as well as receivables valued at S$6.51b due within 12 months. So it has liabilities totalling S$3.57b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of S$5.04b, so it does suggest shareholders should keep an eye on Seatrium's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Seatrium's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Seatrium reported revenue of S$8.4b, which is a gain of 125%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

While we can certainly appreciate Seatrium's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost S$75m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled S$435m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. For riskier companies like Seatrium I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.