Is Siem Offshore (OB: SIOFF) Using Too Much Debt?

Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. We note that Siem Offshore Inc. (OB: SIOFF) has debt on its balance sheet. But should shareholders be concerned about its use of debt?

What risk does debt entail?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

See our latest review for Siem Offshore

What is Siem Offshore’s debt?

You can click on the chart below for historical figures, but it shows Siem Offshore had $ 674.0 million in debt in September 2021, up from $ 1.05 billion a year earlier. On the other hand, it has $ 89.6 million in cash, resulting in net debt of around $ 584.4 million.

OB: SIOFF History of debt to equity November 5, 2021

How strong is Siem Offshore’s balance sheet?

According to the latest published balance sheet, Siem Offshore had liabilities of US $ 93.8 million due within 12 months and liabilities of US $ 651.5 million due beyond 12 months. In compensation for these obligations, he had cash of US $ 89.6 million as well as receivables valued at US $ 55.4 million due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 600.3 million.

This deficit casts a shadow over the $ 80.2 million company, like a colossus towering over mere mortals. We therefore believe that shareholders should watch it closely. After all, Siem Offshore would likely need a major recapitalization if it were to pay its creditors today.

In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Siem Offshore shareholders are faced with the double whammy of a high net debt / EBITDA ratio (7.0) and relatively low interest coverage, since EBIT is only 1.2 times expenses of interest. The debt burden here is considerable. Looking on the bright side, Siem Offshore increased its EBIT by a silky 79% last year. Like a mother’s loving embrace of a newborn, this type of growth builds resilience, putting the business in a stronger position to manage debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is Siem Offshore’s profits that will influence the balance sheet in the future. So if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.

Finally, a business can only pay off its debts with hard cash, not with book profits. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, Siem Offshore has actually generated more free cash flow than EBIT. This kind of solid money conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.

Our point of view

At first glance, Siem Offshore’s interest coverage left us hesitant about the title, and its total liability level was no more appealing than the only restaurant empty on the busiest night of the year. But at least it’s pretty decent to convert EBIT into free cash flow; it’s encouraging. Once we consider all of the above factors together, it seems to us that Siem Offshore’s debt makes it a bit risky. This isn’t necessarily a bad thing, but we would generally feel more comfortable with less leverage. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. Be aware that Siem Offshore shows 5 warning signs in our investment analysis , and 2 of them should not be ignored …

At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.

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

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John A. Bogar

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