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

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.' 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 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?

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

Check out the opportunities and risks within the HK Shipping industry.

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¥51.3b at the end of June 2022, a reduction from CN¥86.5b over a year. But on the other hand it also has CN¥248.5b in cash, leading to a CN¥197.2b net cash position.

How Healthy Is COSCO SHIPPING Holdings' Balance Sheet?

The latest balance sheet data shows that COSCO SHIPPING Holdings had liabilities of CN¥161.2b due within a year, and liabilities of CN¥94.1b falling due after that. On the other hand, it had cash of CN¥248.5b and CN¥17.5b worth of receivables due within a year. So it can boast CN¥10.7b more liquid assets than total liabilities.

This short term liquidity is a sign that COSCO SHIPPING Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that COSCO SHIPPING Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that COSCO SHIPPING Holdings grew its EBIT by 185% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine COSCO SHIPPING Holdings's ability to maintain a healthy balance sheet going forward. 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

While we empathize with investors who find debt concerning, you should keep in mind that COSCO SHIPPING Holdings has net cash of CN¥197.2b, as well as more liquid assets than liabilities. The cherry on top was that in converted 134% of that EBIT to free cash flow, bringing in CN¥211b. So we don't think COSCO SHIPPING Holdings's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for COSCO SHIPPING Holdings (of which 1 is a bit concerning!) you should know about.

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.