Posted on August 2, 2023
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ 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 can see that Seanergy Maritime Holdings Corp. (NASDAQ:SHIP) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Seanergy Maritime Holdings’s Debt?
As you can see below, Seanergy Maritime Holdings had US$225.8m of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. However, it also had US$20.5m in cash, and so its net debt is US$205.3m.
NasdaqCM:SHIP Debt to Equity History July 31st 2023
How Healthy Is Seanergy Maritime Holdings’ Balance Sheet?
The latest balance sheet data shows that Seanergy Maritime Holdings had liabilities of US$94.7m due within a year, and liabilities of US$246.6m falling due after that. Offsetting this, it had US$20.5m in cash and US$1.55m in receivables that were due within 12 months. So its liabilities total US$319.1m more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the US$117.5m 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’d watch its balance sheet closely, without a doubt. At the end of the day, Seanergy Maritime Holdings would probably need a major re-capitalization if its creditors were to demand repayment.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Weak interest cover of 0.96 times and a disturbingly high net debt to EBITDA ratio of 5.1 hit our confidence in Seanergy Maritime Holdings like a one-two punch to the gut. The debt burden here is substantial. Even worse, Seanergy Maritime Holdings saw its EBIT tank 78% over the last 12 months. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. 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 Seanergy Maritime Holdings’s ability to maintain a healthy balance sheet going forward.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Seanergy Maritime Holdings burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
