We Think Hapag-Lloyd (ETR:HLAG) Can Manage Its Debt With Ease

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 Hapag-Lloyd Aktiengesellschaft (ETR:HLAG) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Hapag-Lloyd

How Much Debt Does Hapag-Lloyd Carry?

You can click the graphic below for the historical numbers, but it shows that Hapag-Lloyd had €2.62b of debt in March 2023, down from €3.02b, one year before. But on the other hand it also has €17.7b in cash, leading to a €15.1b net cash position.

A Look At Hapag-Lloyd's Liabilities

We can see from the most recent balance sheet that Hapag-Lloyd had liabilities of €6.20b falling due within a year, and liabilities of €4.07b due beyond that. Offsetting these obligations, it had cash of €17.7b as well as receivables valued at €2.28b due within 12 months. So it can boast €9.70b more liquid assets than total liabilities.

It's good to see that Hapag-Lloyd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. 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!

Also positive, Hapag-Lloyd grew its EBIT by 21% in the last year, and that should make it 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hapag-Lloyd has net cash of €15.1b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €16b, being 107% of its EBIT. So we don't think Hapag-Lloyd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Hapag-Lloyd is showing 3 warning signs in our investment analysis , and 1 of those is potentially serious...

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.