These 4 Measures Indicate That CNOOC Energy Technology & Services (SHSE:600968) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that CNOOC Energy Technology & Services Limited (SHSE:600968) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for CNOOC Energy Technology & Services

What Is CNOOC Energy Technology & Services's Debt?

As you can see below, at the end of March 2024, CNOOC Energy Technology & Services had CN¥2.44b of debt, up from CN¥1.59b a year ago. Click the image for more detail. But on the other hand it also has CN¥9.24b in cash, leading to a CN¥6.79b net cash position.

A Look At CNOOC Energy Technology & Services' Liabilities

We can see from the most recent balance sheet that CNOOC Energy Technology & Services had liabilities of CN¥13.5b falling due within a year, and liabilities of CN¥3.10b due beyond that. On the other hand, it had cash of CN¥9.24b and CN¥11.5b worth of receivables due within a year. So it can boast CN¥4.09b more liquid assets than total liabilities.

This short term liquidity is a sign that CNOOC Energy Technology & Services could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, CNOOC Energy Technology & Services boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that CNOOC Energy Technology & Services has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. 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 CNOOC Energy Technology & Services 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 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. Over the last three years, CNOOC Energy Technology & Services recorded free cash flow worth a fulsome 80% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case CNOOC Energy Technology & Services has CN¥6.79b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 80% of that EBIT to free cash flow, bringing in CN¥2.7b. So we don't think CNOOC Energy Technology & Services's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for CNOOC Energy Technology & Services you should be aware of.

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.