| Metric | Dec-12 | Dec-11 | Dec-10 |
|---|---|---|---|
| Revenue | $115 | ||
| COGS | $132 | ||
| Gross Margin | -15% | ||
| Operating Expenses | $9 | ||
| Operating Income | -$26 | ||
| Interest Expense | $9 | $7 | $3 |
| Net Income (Excluding one-off items) | -$17 | ||
| One-off was $10 mil loss from asset sales |
Figures in millions of $US
Scorpio Tankers Inc. (NYSE:STNG)’s interest costs have risen at a CAGR of 73% during the past three years. Surprisingly, while interest costs have grown, net debt has remained almost constant, indicating that the company’s credit rating is falling and creditors are demanding more interest from the company
Meanwhile, the company’s operations are costing more to operate than they are generating in income. Indeed, Scorpio Tankers Inc. (NYSE:STNG) has not turned a profit since 2010 as the company’s operating costs and debt interest are rising faster than revenue and margins.
With debt interest rising while net debt remains constant, and the company’s costs exceeding revenue, Scorpio Tankers Inc. (NYSE:STNG) should be avoided.
The Hunger Games
Lastly, Lions Gate Entertainment Corp. (USA) (NYSE:LGF), apart from the one-off success of the Hunger Games, has been struggling during the past few years. The company has reported losses at least every year over the past five years.
| Metric | Dec-12 | Dec-11 | Dec-10 |
|---|---|---|---|
| Revenue | $1,600 | ||
| COGS | $907 | ||
| Gross Margin | 43% | ||
| Operating Expenses | $653 | ||
| Operating Income | $40 | ||
| Interest Expense | $78 | $55 | $58 |
| Net Income | -$39 |
Figures in millions of $US
Lions Gate Entertainment Corp. (USA) (NYSE:LGF) has a decent gross margin, but operating expenses consume almost all of it. Having said that, the company would have made a profit during 2012,2011, and 2010 if it were not for its rapidly rising interest costs.
Lions Gate Entertainment Corp. (USA) (NYSE:LGF)’s pre-tax income excluding interest costs was $31 million during 2010, $6 million during 2011, and $44 million during 2012. Including interest costs, the company actually reported a losses. Furthermore, during this period, net debt grew 110%.
So, despite the success of the Hunger Games, Lions Gate Entertainment Corp. (USA) (NYSE:LGF) does not appear to be a decent investment judging by its spiking debt and interest costs.
Conclusion
While these three companies may have borrowed cash in an attempt to boost shareholder value, their debt is now coming back to haunt them as interest costs strangle their income and shareholder value is erased. Until debt is paid down or income increases significantly, investors should stay away from Lions Gate Entertainment Corp. (USA) (NYSE:LGF), Scorpio Tankers Inc. (NYSE:STNG), and SunPower Corporation (NASDAQ:SPWR) and their constricting levels of debt.
The article 4 Companies That Are Being Strangled By Debt originally appeared on Fool.com is written by Rupert Hargreaves.
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