Is CNOOC (HKG:883) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies CNOOC Limited (HKG:883) makes use of debt. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

How Much Debt Does CNOOC Carry?

The image below, which you can click on for greater detail, shows that CNOOC had debt of CN¥83.4b at the end of March 2025, a reduction from CN¥113.0b over a year. But it also has CN¥230.4b in cash to offset that, meaning it has CN¥147.0b net cash.

How Healthy Is CNOOC's Balance Sheet?

According to the last reported balance sheet, CNOOC had liabilities of CN¥125.3b due within 12 months, and liabilities of CN¥191.6b due beyond 12 months. Offsetting this, it had CN¥230.4b in cash and CN¥56.4b in receivables that were due within 12 months. So its liabilities total CN¥30.1b more than the combination of its cash and short-term receivables.

Given CNOOC has a humongous market capitalization of CN¥849.3b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, CNOOC boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for CNOOC

Fortunately, CNOOC grew its EBIT by 6.1% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if CNOOC can strengthen its balance sheet over time. 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. CNOOC 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. During the last three years, CNOOC produced sturdy free cash flow equating to 56% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about CNOOC's liabilities, but we can be reassured by the fact it has has net cash of CN¥147.0b. So we don't think CNOOC's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example CNOOC has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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.

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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.