Is Nanjing Tanker (SHSE:601975) A Risky Investment?

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.' 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 can see that Nanjing Tanker Corporation (SHSE:601975) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Nanjing Tanker

How Much Debt Does Nanjing Tanker Carry?

The image below, which you can click on for greater detail, shows that Nanjing Tanker had debt of CN¥1.37b at the end of September 2024, a reduction from CN¥1.86b over a year. But it also has CN¥4.77b in cash to offset that, meaning it has CN¥3.39b net cash.

How Strong Is Nanjing Tanker's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nanjing Tanker had liabilities of CN¥960.2m due within 12 months and liabilities of CN¥1.32b due beyond that. On the other hand, it had cash of CN¥4.77b and CN¥749.2m worth of receivables due within a year. So it can boast CN¥3.23b more liquid assets than total liabilities.

It's good to see that Nanjing Tanker has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Nanjing Tanker has more cash than debt is arguably a good indication that it can manage its debt safely.

While Nanjing Tanker doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 Nanjing Tanker can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Nanjing Tanker 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. Over the most recent three years, Nanjing Tanker recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Nanjing Tanker has CN¥3.39b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 77% of that EBIT to free cash flow, bringing in CN¥2.1b. So we don't think Nanjing Tanker's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Nanjing Tanker, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.