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 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 A.P. Møller - Mærsk A/S (CPH:MAERSK B) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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?

As you can see below, A.P. Møller - Mærsk had US$3.85b of debt at September 2022, down from US$4.93b a year prior. However, it does have US$8.33b in cash offsetting this, leading to net cash of US$4.48b.

A Look At A.P. Møller - Mærsk's Liabilities

Zooming in on the latest balance sheet data, we can see that A.P. Møller - Mærsk had liabilities of US$13.6b due within 12 months and liabilities of US$15.2b due beyond that. Offsetting these obligations, it had cash of US$8.33b as well as receivables valued at US$25.3b due within 12 months. So it can boast US$4.84b 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.

Even more impressive was the fact that A.P. Møller - Mærsk grew its EBIT by 132% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine A.P. Møller - Mærsk's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. A.P. Møller - Mærsk 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, A.P. Møller - Mærsk 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 A.P. Møller - Mærsk has net cash of US$4.48b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$29b, being 101% of its EBIT. So is A.P. Møller - Mærsk's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with A.P. Møller - Mærsk (including 1 which is potentially serious) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.