Offshore Oil EngineeringLtd (SHSE:600583) Could Easily Take On More Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Offshore Oil Engineering Co.,Ltd (SHSE:600583) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Offshore Oil EngineeringLtd

What Is Offshore Oil EngineeringLtd's Net Debt?

As you can see below, Offshore Oil EngineeringLtd had CN¥220.0m of debt at June 2024, down from CN¥325.9m a year prior. However, its balance sheet shows it holds CN¥15.4b in cash, so it actually has CN¥15.2b net cash.

A Look At Offshore Oil EngineeringLtd's Liabilities

According to the last reported balance sheet, Offshore Oil EngineeringLtd had liabilities of CN¥17.6b due within 12 months, and liabilities of CN¥1.26b due beyond 12 months. Offsetting this, it had CN¥15.4b in cash and CN¥9.83b in receivables that were due within 12 months. So it can boast CN¥6.34b more liquid assets than total liabilities.

This excess liquidity suggests that Offshore Oil EngineeringLtd is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Offshore Oil EngineeringLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Offshore Oil EngineeringLtd's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Offshore Oil EngineeringLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Offshore Oil EngineeringLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Offshore Oil EngineeringLtd actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Offshore Oil EngineeringLtd has net cash of CN¥15.2b, as well as more liquid assets than liabilities. The cherry on top was that in converted 306% of that EBIT to free cash flow, bringing in CN¥3.8b. So we don't think Offshore Oil EngineeringLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Offshore Oil EngineeringLtd you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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