CNOOC Energy Technology & Services (SHSE:600968) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies CNOOC Energy Technology & Services Limited (SHSE:600968) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for CNOOC Energy Technology & Services

How Much Debt Does CNOOC Energy Technology & Services Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 CNOOC Energy Technology & Services had CN¥2.55b of debt, an increase on CN¥2.13b, over one year. However, its balance sheet shows it holds CN¥8.62b in cash, so it actually has CN¥6.07b net cash.

How Healthy Is CNOOC Energy Technology & Services' Balance Sheet?

We can see from the most recent balance sheet that CNOOC Energy Technology & Services had liabilities of CN¥15.5b falling due within a year, and liabilities of CN¥3.63b due beyond that. Offsetting these obligations, it had cash of CN¥8.62b as well as receivables valued at CN¥14.0b due within 12 months. So it actually has CN¥3.47b more liquid assets than total liabilities.

This surplus suggests that CNOOC Energy Technology & Services has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that CNOOC Energy Technology & Services has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, CNOOC Energy Technology & Services grew its EBIT by 36% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine CNOOC Energy Technology & Services'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While CNOOC Energy Technology & Services 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. During the last three years, CNOOC Energy Technology & Services produced sturdy free cash flow equating to 79% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case CNOOC Energy Technology & Services has CN¥6.07b in net cash and a decent-looking balance sheet. And we liked the look of last year's 36% year-on-year EBIT growth. So we don't think CNOOC Energy Technology & Services's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of CNOOC Energy Technology & Services's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.