Hapag-Lloyd (ETR:HLAG) Has A Rock Solid Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Hapag-Lloyd Aktiengesellschaft (ETR:HLAG) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for Hapag-Lloyd

How Much Debt Does Hapag-Lloyd Carry?

As you can see below, Hapag-Lloyd had €3.15b of debt at September 2022, down from €3.38b a year prior. However, its balance sheet shows it holds €15.1b in cash, so it actually has €12.0b net cash.

How Strong Is Hapag-Lloyd's Balance Sheet?

According to the last reported balance sheet, Hapag-Lloyd had liabilities of €7.18b due within 12 months, and liabilities of €4.87b due beyond 12 months. On the other hand, it had cash of €15.1b and €5.37b worth of receivables due within a year. So it actually has €8.45b more liquid assets than total liabilities.

This surplus suggests that Hapag-Lloyd is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Hapag-Lloyd boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Hapag-Lloyd grew its EBIT by 180% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hapag-Lloyd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Hapag-Lloyd 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. Happily for any shareholders, Hapag-Lloyd actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hapag-Lloyd has net cash of €12.0b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €18b, being 104% of its EBIT. The bottom line is that we do not find Hapag-Lloyd's debt levels at all concerning. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Hapag-Lloyd (of which 1 is significant!) 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.