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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Offshore Oil Engineering Co.,Ltd (SHSE:600583) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Offshore Oil EngineeringLtd

How Much Debt Does Offshore Oil EngineeringLtd Carry?

As you can see below, at the end of September 2024, Offshore Oil EngineeringLtd had CN¥601.0m of debt, up from CN¥220.0m a year ago. Click the image for more detail. However, it does have CN¥16.4b in cash offsetting this, leading to net cash of CN¥15.8b.

How Healthy Is Offshore Oil EngineeringLtd's Balance Sheet?

According to the last reported balance sheet, Offshore Oil EngineeringLtd had liabilities of CN¥18.6b due within 12 months, and liabilities of CN¥1.28b due beyond 12 months. Offsetting this, it had CN¥16.4b in cash and CN¥9.88b in receivables that were due within 12 months. So it can boast CN¥6.43b more liquid assets than total liabilities.

This surplus suggests that Offshore Oil EngineeringLtd is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Offshore Oil EngineeringLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Offshore Oil EngineeringLtd grew its EBIT by 6.5% in the last year, making that debt load look even more manageable. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Offshore Oil EngineeringLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Offshore Oil EngineeringLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Offshore Oil EngineeringLtd has CN¥15.8b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 283% of that EBIT to free cash flow, bringing in CN¥1.7b. So is Offshore Oil EngineeringLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. 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.