These 4 Measures Indicate That A.P. Møller - Mærsk (CPH:MAERSK B) Is Using Debt Safely

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. We note that A.P. Møller - Mærsk A/S (CPH:MAERSK B) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

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

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

You can click the graphic below for the historical numbers, but it shows that A.P. Møller - Mærsk had US$6.04b of debt in March 2021, down from US$7.76b, one year before. But on the other hand it also has US$6.42b in cash, leading to a US$381.0m net cash position.

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

Zooming in on the latest balance sheet data, we can see that A.P. Møller - Mærsk had liabilities of US$10.8b due within 12 months and liabilities of US$14.0b due beyond that. Offsetting this, it had US$6.42b in cash and US$6.00b in receivables that were due within 12 months. So it has liabilities totalling US$12.4b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since A.P. Møller - Mærsk has a huge market capitalization of US$55.9b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, A.P. Møller - Mærsk boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, A.P. Møller - Mærsk grew its EBIT by 231% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Happily for any shareholders, A.P. Møller - Mærsk actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While A.P. Møller - Mærsk does have more liabilities than liquid assets, it also has net cash of US$381.0m. And it impressed us with free cash flow of US$8.7b, being 175% of its EBIT. So is A.P. Møller - Mærsk's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with A.P. Møller - Mærsk (including 1 which 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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