Nanjing Tanker (SHSE:601975) Could Easily Take On More Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Nanjing Tanker Corporation (SHSE:601975) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Nanjing Tanker

What Is Nanjing Tanker's Debt?

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 Healthy 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. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Nanjing Tanker boasts net cash, so it's fair to say it does not have a heavy debt load!

Nanjing Tanker's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Nanjing Tanker 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. 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 we empathize with investors who find debt concerning, you should keep in mind that Nanjing Tanker has net cash of CN¥3.39b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥2.1b, being 77% of its EBIT. So is Nanjing Tanker's debt a risk? It doesn't seem so to us. 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.

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.