We Think CNOOC Energy Technology & Services (SHSE:600968) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, CNOOC Energy Technology & Services Limited (SHSE:600968) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View 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 June 2024, CNOOC Energy Technology & Services had CN¥2.20b of debt, up from CN¥1.71b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥9.24b in cash, so it actually has CN¥7.04b net cash.

A Look At CNOOC Energy Technology & Services' Liabilities

Zooming in on the latest balance sheet data, we can see that CNOOC Energy Technology & Services had liabilities of CN¥16.6b due within 12 months and liabilities of CN¥3.33b due beyond that. Offsetting this, it had CN¥9.24b in cash and CN¥13.3b in receivables that were due within 12 months. So it can boast CN¥2.63b 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. Succinctly put, CNOOC Energy Technology & Services boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, CNOOC Energy Technology & Services grew its EBIT by 31% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. CNOOC Energy Technology & Services 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. During the last three years, CNOOC Energy Technology & Services generated free cash flow amounting to a very robust 97% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case CNOOC Energy Technology & Services has CN¥7.04b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥4.5b, being 97% of its EBIT. So we don't think CNOOC Energy Technology & Services's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with CNOOC Energy Technology & Services , and understanding them should be part of your investment process.

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.