- The Shipping Corporation of India Limited (NSE:SCI) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
- Shipping Corporation of India has net debt worth 1.9 times EBITDA, which isn’t too much.
- But its interest cover looks a bit on the low side, with EBIT at only 4.3 times the interest expense.
- A company cannot pay debt with paper profits; it needs cold hard cash. So it’s worth checking how much of that EBIT is backed by free cash flow.
A recent news article published in the Simply Wall website brings out some of the interesting aspects of ‘The Shipping Corporation of India Limited’ and how the debt can create some sort of pressure on it.
When is debt dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow.
Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers.
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.
By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
How much debt does shipping corporation of India carry?
As you can see below, Shipping Corporation of India had ₹42.9b of debt at September 2020, down from ₹51.2b a year prior. However, it does have ₹12.1b in cash offsetting this, leading to net debt of about ₹30.8b.
How healthy is shipping corporation of India’s balance sheet?
According to the last reported balance sheet,
- Shipping Corporation of India had liabilities of ₹37.0b due within 12 months.
- Liabilities of ₹18.8b due beyond 12 months.
- Offsetting this, it had ₹12.1b in cash.
- ₹7.39b in receivables that were due within 12 months.
- So its liabilities total ₹36.3b more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of ₹38.7b, so it does suggest shareholders should keep an eye on Shipping Corporation of India’s use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.
Measuring a company’s debt load
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).
Net debt worth 1.9 times EBITDA
Shipping Corporation of India has net debt worth 1.9 times EBITDA, which isn’t too much, but its interest cover looks a bit on the low side, with EBIT at only 4.3 times the interest expense.
While that doesn’t worry us too much, it does suggest the interest payments are somewhat of a burden.
Notably, Shipping Corporation of India’s EBIT launched higher than Elon Musk, gaining a whopping 166% on last year.
When analysing debt levels, the balance sheet is the obvious place to start.
But you can’t view debt in total isolation; since Shipping Corporation of India will need earnings to service that debt. So if you’re keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Analysts view point
Both Shipping Corporation of India’s ability to to convert EBIT to free cash flow and its EBIT growth rate gave us comfort that it can handle its debt.
Having said that, its level of total liabilities somewhat sensitizes us to potential future risks to the balance sheet.
Considering this range of data points, Shipping Corporation of India is in a good position to manage its debt levels.
Having said that, the load is sufficiently heavy that one would recommend any shareholders keep a close eye on it.
There’s no doubt that debt is on the basis of the balance sheet. However, not all investment risk resides within the balance sheet – far from it.
Be aware that Shipping Corporation of India is showing 4 warning signs in the investment analysis , and 1 of those is a bit unpleasant.
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Source: Simply Wall
