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What Worries Me About Sembcorp Marine Ltd

Shares of oil rig builder Sembcorp Marine Ltd (SGX: S51) have been a painful investment for their investors in the past year, falling by a sharp 46%. But that’s not what worries me about the company.

Sembcorp Marine was also recently kicked out of the Straits Times Index (SGX: ^STI), thereby losing its status as a blue chip stock. That’s not what worries me too.

Here are two things about the company that worry me: (1) A balance sheet that’s in a very weak shape, and (2) an inability to generate cash flow.

Regarding the first point, you can check out the chart immediately below. It plots Sembcorp Marine’s net debt to equity ratio in each quarter since the last-quarter of 2005:

Source: S&P Global Market Intelligence

What we can see is that the net debt to equity ratio for Sembcorp Marine is now 111%. That’s the highest it’s been since 2005. Most of you should know by now that the oil & gas industry is in a very challenging environment at the moment; what helps keep a company from harm in such circumstances is a strong balance sheet.

A strong balance sheet is one that is flush with cash and with minimal or zero debt – last I checked, that’s the opposite of what Sembcorp Marine’s balance sheet looks like.

On my second worry with Sembcorp Marine, it is illustrated in the chart below, which shows the company’s quarterly operating cash flows since the first-quarter of 2013.

Source: S&P Global Market Intelligence

Sembcorp Marine has had trouble generating cash flows from its business since 2014. An inability to produce cash, a weak balance sheet, and a poor market (the company’s order book stands at S$9.2 billion as of 30 June 2016, down 18% from a year ago) can be a very painful combination.

In Sembcorp Marine’s latest 2015 annual report, the company mentioned that its working capital needs have peaked. So, it is expecting to generate stronger cash flows going forward. Moreover, the company also expects its capital expenditures to decline. If true, these can help strengthen Sembcorp Marine’s balance sheet in the years ahead. But as of now, things don’t look good.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any companies mentioned.