Ningbo Ocean Shipping (SHSE:601022) Seems To Use Debt Quite Sensibly

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Ningbo Ocean Shipping Co., Ltd. (SHSE:601022) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Ningbo Ocean Shipping

How Much Debt Does Ningbo Ocean Shipping Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Ningbo Ocean Shipping had CN¥560.3m of debt, an increase on CN¥525.7m, over one year. However, its balance sheet shows it holds CN¥1.21b in cash, so it actually has CN¥647.8m net cash.

How Strong Is Ningbo Ocean Shipping's Balance Sheet?

We can see from the most recent balance sheet that Ningbo Ocean Shipping had liabilities of CN¥2.27b falling due within a year, and liabilities of CN¥197.3m due beyond that. On the other hand, it had cash of CN¥1.21b and CN¥1.35b worth of receivables due within a year. So it can boast CN¥91.9m more liquid assets than total liabilities.

This state of affairs indicates that Ningbo Ocean Shipping's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥10.1b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Ningbo Ocean Shipping boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Ningbo Ocean Shipping grew its EBIT by 2.4% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ningbo Ocean Shipping's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Ningbo Ocean Shipping 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 last three years, Ningbo Ocean Shipping recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ningbo Ocean Shipping has net cash of CN¥647.8m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 2.4% in the last twelve months. So we don't have any problem with Ningbo Ocean Shipping's use of debt. 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 Ningbo Ocean Shipping , 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.