We Think A.P. Møller - Mærsk (CPH:MAERSK B) Can Stay On Top Of Its Debt

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. 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?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. 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?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 A.P. Møller - Mærsk had US$4.37b of debt, an increase on US$4.03b, over one year. But it also has US$6.70b in cash to offset that, meaning it has US$2.34b net cash.

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$12.4b due within a year, and liabilities of US$14.6b falling due after that. Offsetting this, it had US$6.70b in cash and US$19.5b in receivables that were due within 12 months. So it has liabilities totalling US$842.0m more than its cash and near-term receivables, combined.

Of course, A.P. Møller - Mærsk has a titanic market capitalization of US$20.3b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

In fact A.P. Møller - Mærsk's saving grace is its low debt levels, because its EBIT has tanked 89% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

We could understand if investors are concerned about A.P. Møller - Mærsk's liabilities, but we can be reassured by the fact it has has net cash of US$2.34b. And it impressed us with free cash flow of US$6.0b, being 103% of its EBIT. So we don't have any problem with A.P. Møller - Mærsk's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for A.P. Møller - Mærsk (of which 1 is significant!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.