These 4 Measures Indicate That Offshore Oil EngineeringLtd (SHSE:600583) Is Using Debt Safely

Warren Buffett famously said, '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. Importantly, Offshore Oil Engineering Co.,Ltd (SHSE:600583) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Offshore Oil EngineeringLtd

What Is Offshore Oil EngineeringLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Offshore Oil EngineeringLtd had debt of CN¥220.0m at the end of March 2024, a reduction from CN¥640.4m over a year. However, it does have CN¥16.1b in cash offsetting this, leading to net cash of CN¥15.9b.

How Strong Is Offshore Oil EngineeringLtd's Balance Sheet?

According to the last reported balance sheet, Offshore Oil EngineeringLtd had liabilities of CN¥16.1b due within 12 months, and liabilities of CN¥796.6m due beyond 12 months. On the other hand, it had cash of CN¥16.1b and CN¥8.08b worth of receivables due within a year. So it actually has CN¥7.24b 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. Succinctly put, Offshore Oil EngineeringLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Offshore Oil EngineeringLtd grew its EBIT at 12% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Offshore Oil EngineeringLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Offshore Oil EngineeringLtd has CN¥15.9b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥6.9b, being 330% of its EBIT. So we don't think Offshore Oil EngineeringLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Offshore Oil EngineeringLtd , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com