We Think A.P. Møller - Mærsk (CPH:MAERSK B) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that A.P. Møller - Mærsk A/S (CPH:MAERSK B) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for A.P. Møller - Mærsk

What Is A.P. Møller - Mærsk's Debt?

The image below, which you can click on for greater detail, shows that A.P. Møller - Mærsk had debt of US$4.93b at the end of September 2021, a reduction from US$8.14b over a year. But on the other hand it also has US$11.3b in cash, leading to a US$6.37b net cash position.

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

The latest balance sheet data shows that A.P. Møller - Mærsk had liabilities of US$11.1b due within a year, and liabilities of US$14.5b falling due after that. Offsetting this, it had US$11.3b in cash and US$7.28b in receivables that were due within 12 months. So it has liabilities totalling US$7.04b more than its cash and near-term receivables, combined.

Since publicly traded A.P. Møller - Mærsk shares are worth a very impressive total of US$66.7b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 398% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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 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. 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. 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 A.P. Møller - Mærsk does have more liabilities than liquid assets, it also has net cash of US$6.37b. The cherry on top was that in converted 138% of that EBIT to free cash flow, bringing in US$15b. So we don't think A.P. Møller - Mærsk's use of debt is risky. 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. 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 can't be ignored!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.