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

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. Importantly, A.P. Møller - Mærsk A/S (CPH:MAERSK B) does carry debt. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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

How Much Debt Does A.P. Møller - Mærsk Carry?

You can click the graphic below for the historical numbers, but it shows that A.P. Møller - Mærsk had US$4.78b of debt in December 2021, down from US$6.63b, one year before. But it also has US$11.8b in cash to offset that, meaning it has US$7.05b net cash.

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

The latest balance sheet data shows that A.P. Møller - Mærsk had liabilities of US$12.1b due within a year, and liabilities of US$14.6b falling due after that. Offsetting these obligations, it had cash of US$11.8b as well as receivables valued at US$11.5b due within 12 months. So it has liabilities totalling US$3.32b more than its cash and near-term receivables, combined.

Given A.P. Møller - Mærsk has a humongous market capitalization of US$51.9b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, A.P. Møller - Mærsk also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, A.P. Møller - Mærsk grew its EBIT by 438% last year, which is an impressive improvement. 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 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. 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 it is always sensible to look at a company's total liabilities, it is very reassuring that A.P. Møller - Mærsk has US$7.05b in net cash. The cherry on top was that in converted 118% of that EBIT to free cash flow, bringing in US$19b. So we don't think A.P. Møller - Mærsk's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example A.P. Møller - Mærsk has 2 warning signs (and 1 which shouldn't be ignored) we think 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.

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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.