These 4 Measures Indicate That Hainan Strait ShippingLtd (SZSE:002320) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Hainan Strait Shipping Co.,Ltd. (SZSE:002320) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Hainan Strait ShippingLtd

What Is Hainan Strait ShippingLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Hainan Strait ShippingLtd had CN¥520.9m of debt, an increase on CN¥431.8m, over one year. But on the other hand it also has CN¥1.90b in cash, leading to a CN¥1.38b net cash position.

How Healthy Is Hainan Strait ShippingLtd's Balance Sheet?

According to the last reported balance sheet, Hainan Strait ShippingLtd had liabilities of CN¥821.8m due within 12 months, and liabilities of CN¥685.6m due beyond 12 months. 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!

On top of that, Hainan Strait ShippingLtd grew its EBIT by 52% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Hainan Strait ShippingLtd'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 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 free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hainan Strait ShippingLtd has net cash of CN¥1.38b, as well as more liquid assets than liabilities. And we liked the look of last year's 52% year-on-year EBIT growth. So we don't think Hainan Strait ShippingLtd's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Hainan Strait ShippingLtd you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.