Here’s Why Siem Offshore (OB:SIOFF) Has Significant Leverage

David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We note that Siem Offshore Inc. (OB:SIOFF) has a debt on its balance sheet. But does this debt worry shareholders?

Why is debt risky?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

Check out our latest analysis for Siem Offshore

What is Siem Offshore’s debt?

As you can see below, Siem Offshore had a debt of US$661.0 million in December 2021, compared to US$1.08 billion the previous year. On the other hand, he has $91.8 million in cash, resulting in a net debt of around $569.2 million.

OB: SIOFF Debt to Equity March 3, 2022

A Look at Siem Offshore’s Responsibilities

The latest balance sheet data shows that Siem Offshore had liabilities of $105.6 million due within the year, and liabilities of $627.6 million due thereafter. In compensation for these obligations, it had cash of US$91.8 million as well as receivables valued at US$55.6 million and maturing within 12 months. Thus, its liabilities outweigh the sum of its cash and receivables (current) by $585.7 million.

The deficiency here weighs heavily on the $133.1 million business itself, like a child struggling under the weight of a huge backpack full of books, his gym gear and a trumpet. . So we definitely think shareholders need to watch this one closely. Ultimately, Siem Offshore would likely need a significant recapitalization if its creditors demanded repayment.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.

Siem Offshore shareholders face the double whammy of a high net debt to EBITDA ratio (5.7) and quite low interest coverage, as EBIT is only 1.3 times the charge of interests. This means that we would consider him to be heavily indebted. However, shareholders should be reassured to remember that Siem Offshore has actually increased its EBIT by 406% over the past 12 months. If he can keep walking on this path, he will be able to get rid of his debt with relative ease. The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of Siem Offshore that will influence the balance sheet in the future. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

Finally, a business needs free cash flow to pay off its debts; book profits are not enough. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, Siem Offshore has actually produced more free cash flow than EBIT. There’s nothing better than incoming money to stay in the good books of your lenders.

Our point of view

While Siem Offshore’s total passive level makes us nervous. For example, its EBIT to free cash flow conversion and EBIT growth rate give us some confidence in its ability to manage its debt. Considering the above factors, we believe Siem Offshore’s debt poses certain risks to the business. So even if this leverage increases return on equity, we wouldn’t really want to see it increase from now on. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Example: we have identified 3 warning signs for Siem Offshore you should know, and 2 of them make us uncomfortable.

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

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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John A. Bogar