COSCO SHIPPING Holdings (HKG:1919) Seems To Use Debt Rather Sparingly

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. We note that COSCO SHIPPING Holdings Co., Ltd. (HKG:1919) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for COSCO SHIPPING Holdings

What Is COSCO SHIPPING Holdings's Debt?

As you can see below, COSCO SHIPPING Holdings had CN¥92.0b of debt at September 2021, down from CN¥110.3b a year prior. But it also has CN¥145.2b in cash to offset that, meaning it has CN¥53.2b net cash.

How Strong Is COSCO SHIPPING Holdings' Balance Sheet?

According to the last reported balance sheet, COSCO SHIPPING Holdings had liabilities of CN¥101.8b due within 12 months, and liabilities of CN¥119.2b due beyond 12 months. Offsetting this, it had CN¥145.2b in cash and CN¥17.0b in receivables that were due within 12 months. So it has liabilities totalling CN¥58.8b more than its cash and near-term receivables, combined.

This deficit isn't so bad because COSCO SHIPPING Holdings is worth a massive CN¥278.0b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, COSCO SHIPPING Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, COSCO SHIPPING Holdings grew its EBIT by 1,206% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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, 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. Happily for any shareholders, COSCO SHIPPING Holdings 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

Although COSCO SHIPPING Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥53.2b. The cherry on top was that in converted 133% of that EBIT to free cash flow, bringing in CN¥128b. So we don't think COSCO SHIPPING Holdings's use of debt is risky. 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. We've identified 2 warning signs with COSCO SHIPPING Holdings (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.