COSCO SHIPPING Holdings (HKG:1919) Has A Pretty Healthy Balance Sheet

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that COSCO SHIPPING Holdings Co., Ltd. (HKG:1919) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for COSCO SHIPPING Holdings

What Is COSCO SHIPPING Holdings's Debt?

The image below, which you can click on for greater detail, shows that COSCO SHIPPING Holdings had debt of CN¥52.7b at the end of March 2023, a reduction from CN¥86.4b over a year. But on the other hand it also has CN¥223.7b in cash, leading to a CN¥171.1b net cash position.

How Healthy Is COSCO SHIPPING Holdings' Balance Sheet?

We can see from the most recent balance sheet that COSCO SHIPPING Holdings had liabilities of CN¥144.0b falling due within a year, and liabilities of CN¥96.9b due beyond that. Offsetting this, it had CN¥223.7b in cash and CN¥12.0b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥5.19b.

Of course, COSCO SHIPPING Holdings has a titanic market capitalization of CN¥153.8b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, COSCO SHIPPING Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, COSCO SHIPPING Holdings's EBIT dived 14%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 COSCO SHIPPING Holdings 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. COSCO SHIPPING Holdings 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, COSCO SHIPPING Holdings actually produced more free cash flow than EBIT. 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 COSCO SHIPPING Holdings has CN¥171.1b in net cash. And it impressed us with free cash flow of CN¥126b, being 125% of its EBIT. So we are not troubled with COSCO SHIPPING Holdings's debt use. 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. For example, we've discovered 2 warning signs for COSCO SHIPPING Holdings (1 is a bit unpleasant!) that you should be aware of before investing here.

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.