Does A.P. Møller - Mærsk (CPH:MAERSK B) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, A.P. Møller - Mærsk A/S (CPH:MAERSK B) does carry debt. But is this debt a concern to shareholders?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for A.P. Møller - Mærsk

What Is A.P. Møller - Mærsk's Net Debt?

As you can see below, A.P. Møller - Mærsk had US$4.03b of debt at December 2022, down from US$4.78b a year prior. However, its balance sheet shows it holds US$11.0b in cash, so it actually has US$6.97b net cash.

How Strong Is A.P. Møller - Mærsk's Balance Sheet?

We can see from the most recent balance sheet that A.P. Møller - Mærsk had liabilities of US$13.3b falling due within a year, and liabilities of US$15.3b due beyond that. Offsetting this, it had US$11.0b in cash and US$25.9b in receivables that were due within 12 months. So it actually has US$8.30b more liquid assets than total liabilities.

This excess liquidity suggests that A.P. Møller - Mærsk is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, A.P. Møller - Mærsk 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 A.P. Møller - Mærsk has boosted its EBIT by 58%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if A.P. Møller - Mærsk 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 company can only pay off debt with cold hard cash, not accounting profits. While A.P. Møller - Mærsk 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, A.P. Møller - Mærsk actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case A.P. Møller - Mærsk has US$6.97b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$30b, being 104% of its EBIT. When it comes to A.P. Møller - Mærsk's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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 3 warning signs for A.P. Møller - Mærsk (of which 1 is a bit unpleasant!) you should know about.

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.