Does COSCO SHIPPING Holdings (HKG:1919) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that COSCO SHIPPING Holdings Co., Ltd. (HKG:1919) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for COSCO SHIPPING Holdings

What Is COSCO SHIPPING Holdings's Net Debt?

As you can see below, COSCO SHIPPING Holdings had CN¥42.8b of debt at December 2022, down from CN¥73.3b a year prior. However, its balance sheet shows it holds CN¥237.2b in cash, so it actually has CN¥194.4b net cash.

How Healthy Is COSCO SHIPPING Holdings' Balance Sheet?

The latest balance sheet data shows that COSCO SHIPPING Holdings had liabilities of CN¥159.4b due within a year, and liabilities of CN¥98.9b falling due after that. On the other hand, it had cash of CN¥237.2b and CN¥14.2b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥6.79b.

Since publicly traded COSCO SHIPPING Holdings shares are worth a very impressive total of CN¥168.4b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

Another good sign is that COSCO SHIPPING Holdings has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. 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. 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. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

We could understand if investors are concerned about COSCO SHIPPING Holdings's liabilities, but we can be reassured by the fact it has has net cash of CN¥194.4b. And it impressed us with free cash flow of CN¥186b, being 128% of its EBIT. So is COSCO SHIPPING Holdings's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for COSCO SHIPPING Holdings (1 is potentially serious) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.