Hainan Strait ShippingLtd (SZSE:002320) Seems To Use Debt Rather Sparingly

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 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. As with many other companies Hainan Strait Shipping Co.,Ltd. (SZSE:002320) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hainan Strait ShippingLtd

How Much Debt Does Hainan Strait ShippingLtd Carry?

As you can see below, at the end of March 2024, Hainan Strait ShippingLtd had CN¥520.9m of debt, up from CN¥431.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.90b in cash, so it actually has CN¥1.38b net cash.

How Strong Is Hainan Strait ShippingLtd's Balance Sheet?

We can see from the most recent balance sheet that Hainan Strait ShippingLtd had liabilities of CN¥821.8m falling due within a year, and liabilities of CN¥685.6m due beyond that. On the other hand, it had cash of CN¥1.90b and CN¥340.7m worth of receivables due within a year. So it actually has CN¥736.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Hainan Strait ShippingLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Hainan Strait ShippingLtd 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 Hainan Strait ShippingLtd has boosted its EBIT by 52%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Hainan Strait ShippingLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Hainan Strait ShippingLtd 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, Hainan Strait ShippingLtd recorded free cash flow worth 60% 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 it is always sensible to investigate a company's debt, in this case Hainan Strait ShippingLtd has CN¥1.38b in net cash and a decent-looking balance sheet. And we liked the look of last year's 52% year-on-year EBIT growth. So is Hainan Strait ShippingLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Hainan Strait ShippingLtd that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.