COSCO SHIPPING Specialized CarriersLtd (SHSE:600428) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that COSCO SHIPPING Specialized Carriers Co.,Ltd. (SHSE:600428) does have debt on its balance sheet. But is this debt a concern to shareholders?

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

Check out our latest analysis for COSCO SHIPPING Specialized CarriersLtd

What Is COSCO SHIPPING Specialized CarriersLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 COSCO SHIPPING Specialized CarriersLtd had CN¥7.69b of debt, an increase on CN¥6.81b, over one year. However, it also had CN¥2.22b in cash, and so its net debt is CN¥5.48b.

How Healthy Is COSCO SHIPPING Specialized CarriersLtd's Balance Sheet?

The latest balance sheet data shows that COSCO SHIPPING Specialized CarriersLtd had liabilities of CN¥8.47b due within a year, and liabilities of CN¥11.4b falling due after that. On the other hand, it had cash of CN¥2.22b and CN¥2.12b worth of receivables due within a year. So it has liabilities totalling CN¥15.5b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of CN¥14.1b, we think shareholders really should watch COSCO SHIPPING Specialized CarriersLtd's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

With a debt to EBITDA ratio of 2.1, COSCO SHIPPING Specialized CarriersLtd uses debt artfully but responsibly. And the fact that its trailing twelve months of EBIT was 8.2 times its interest expenses harmonizes with that theme. Importantly, COSCO SHIPPING Specialized CarriersLtd grew its EBIT by 48% over the last twelve months, and that growth will make it easier to handle its 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 COSCO SHIPPING Specialized CarriersLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, COSCO SHIPPING Specialized CarriersLtd actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

Both COSCO SHIPPING Specialized CarriersLtd's ability to to convert EBIT to free cash flow and its EBIT growth rate gave us comfort that it can handle its debt. But truth be told its level of total liabilities had us nibbling our nails. When we consider all the elements mentioned above, it seems to us that COSCO SHIPPING Specialized CarriersLtd is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with COSCO SHIPPING Specialized CarriersLtd .

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.