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

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.' 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. We note that A.P. Møller - Mærsk A/S (CPH:MAERSK B) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 A.P. Møller - Mærsk

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

The image below, which you can click on for greater detail, shows that A.P. Møller - Mærsk had debt of US$3.85b at the end of June 2023, a reduction from US$4.18b over a year. But on the other hand it also has US$22.2b in cash, leading to a US$18.3b net cash position.

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$12.5b falling due within a year, and liabilities of US$14.6b due beyond that. Offsetting these obligations, it had cash of US$22.2b as well as receivables valued at US$8.08b due within 12 months. So it actually has US$3.18b more liquid assets than total liabilities.

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

It is just as well that A.P. Møller - Mærsk's load is not too heavy, because its EBIT was down 38% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that A.P. Møller - Mærsk has net cash of US$18.3b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$22b, being 106% of its EBIT. So we are not troubled with A.P. Møller - Mærsk's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with A.P. Møller - Mærsk (including 1 which shouldn't be ignored) .

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.