We Think Hainan Strait ShippingLtd (SZSE:002320) Can Manage Its Debt With Ease

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Hainan Strait Shipping Co.,Ltd. (SZSE:002320) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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. 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?

The image below, which you can click on for greater detail, shows that at September 2024 Hainan Strait ShippingLtd had debt of CN¥512.1m, up from CN¥436.1m in one year. However, its balance sheet shows it holds CN¥1.68b in cash, so it actually has CN¥1.17b net cash.

How Strong Is Hainan Strait ShippingLtd's Balance Sheet?

The latest balance sheet data shows that Hainan Strait ShippingLtd had liabilities of CN¥752.5m due within a year, and liabilities of CN¥645.2m falling due after that. Offsetting these obligations, it had cash of CN¥1.68b as well as receivables valued at CN¥380.2m due within 12 months. So it actually has CN¥660.2m more liquid assets than total liabilities.

This surplus suggests that Hainan Strait ShippingLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Hainan Strait ShippingLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Hainan Strait ShippingLtd saw its EBIT decline by 2.4% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hainan Strait ShippingLtd 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Hainan Strait ShippingLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Hainan Strait ShippingLtd recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

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¥1.17b, as well as more liquid assets than liabilities. The cherry on top was that in converted 90% of that EBIT to free cash flow, bringing in CN¥1.3b. 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. To that end, you should be aware of the 1 warning sign we've spotted with Hainan Strait ShippingLtd .

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.