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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out 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¥43.5b at the end of September 2024, a reduction from CN¥52.1b over a year. However, it does have CN¥190.9b in cash offsetting this, leading to net cash of CN¥147.4b.

How Healthy Is COSCO SHIPPING Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that COSCO SHIPPING Holdings had liabilities of CN¥132.3b due within 12 months and liabilities of CN¥85.3b due beyond that. On the other hand, it had cash of CN¥190.9b and CN¥15.6b worth of receivables due within a year. So its liabilities total CN¥11.1b more than the combination of its cash and short-term receivables.

Since publicly traded COSCO SHIPPING Holdings shares are worth a very impressive total of CN¥206.6b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, COSCO SHIPPING Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

COSCO SHIPPING Holdings's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. 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¥147.4b in net cash. The cherry on top was that in converted 108% of that EBIT to free cash flow, bringing in CN¥33b. So is COSCO SHIPPING Holdings's debt a risk? It doesn't seem so to us. 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. We've identified 2 warning signs with COSCO SHIPPING Holdings (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.