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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that COSCO SHIPPING Holdings Co., Ltd. (HKG:1919) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 COSCO SHIPPING Holdings

How Much Debt Does COSCO SHIPPING Holdings Carry?

The image below, which you can click on for greater detail, shows that COSCO SHIPPING Holdings had debt of CN¥35.1b at the end of June 2024, a reduction from CN¥42.9b over a year. However, it does have CN¥173.7b in cash offsetting this, leading to net cash of CN¥138.6b.

How Strong Is COSCO SHIPPING Holdings' Balance Sheet?

According to the last reported balance sheet, COSCO SHIPPING Holdings had liabilities of CN¥123.4b due within 12 months, and liabilities of CN¥86.3b due beyond 12 months. On the other hand, it had cash of CN¥173.7b and CN¥15.2b worth of receivables due within a year. So it has liabilities totalling CN¥20.8b more than its cash and near-term receivables, combined.

Of course, COSCO SHIPPING Holdings has a titanic market capitalization of CN¥215.8b, 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. Despite its noteworthy liabilities, COSCO SHIPPING Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact COSCO SHIPPING Holdings's saving grace is its low debt levels, because its EBIT has tanked 70% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While COSCO SHIPPING Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, COSCO SHIPPING Holdings actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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¥138.6b in net cash. The cherry on top was that in converted 108% of that EBIT to free cash flow, bringing in CN¥12b. So we don't have any problem with COSCO SHIPPING Holdings's use of debt. 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. Case in point: We've spotted 3 warning signs for COSCO SHIPPING Holdings you should be aware of, and 1 of them doesn't sit too well with us.

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.