Nanjing Tanker (SHSE:601975) Seems To Use Debt Rather Sparingly

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. Importantly, Nanjing Tanker Corporation (SHSE:601975) does carry debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

See our latest analysis for Nanjing Tanker

How Much Debt Does Nanjing Tanker Carry?

As you can see below, Nanjing Tanker had CN¥1.86b of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥2.84b in cash, leading to a CN¥978.2m net cash position.

How Healthy Is Nanjing Tanker's Balance Sheet?

According to the last reported balance sheet, Nanjing Tanker had liabilities of CN¥1.12b due within 12 months, and liabilities of CN¥1.77b due beyond 12 months. Offsetting this, it had CN¥2.84b in cash and CN¥965.7m in receivables that were due within 12 months. So it can boast CN¥914.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Nanjing Tanker could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Nanjing Tanker 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 Nanjing Tanker has boosted its EBIT by 62%, 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 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Nanjing Tanker 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 most recent three years, Nanjing Tanker recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Nanjing Tanker has CN¥978.2m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 62% over the last year. So we don't think Nanjing Tanker'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 Nanjing Tanker'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.