Ningbo Ocean Shipping (SHSE:601022) Takes On Some Risk With Its Use Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Ningbo Ocean Shipping Co., Ltd. (SHSE:601022) does carry debt. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Ningbo Ocean Shipping

How Much Debt Does Ningbo Ocean Shipping Carry?

As you can see below, at the end of March 2024, Ningbo Ocean Shipping had CN¥665.7m of debt, up from CN¥557.1m a year ago. Click the image for more detail. But it also has CN¥1.17b in cash to offset that, meaning it has CN¥506.2m net cash.

A Look At Ningbo Ocean Shipping's Liabilities

According to the last reported balance sheet, Ningbo Ocean Shipping had liabilities of CN¥1.39b due within 12 months, and liabilities of CN¥610.7m due beyond 12 months. On the other hand, it had cash of CN¥1.17b and CN¥1.01b worth of receivables due within a year. So it can boast CN¥182.2m 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¥10.6b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Ningbo Ocean Shipping has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Ningbo Ocean Shipping if management cannot prevent a repeat of the 31% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last three years, Ningbo Ocean Shipping burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Ningbo Ocean Shipping has CN¥506.2m in net cash and a decent-looking balance sheet. So while Ningbo Ocean Shipping does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Ningbo Ocean Shipping you should be aware of, and 1 of them is a bit unpleasant.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.