Here's Why COSCO SHIPPING Holdings (HKG:1919) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies COSCO SHIPPING Holdings Co., Ltd. (HKG:1919) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out 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¥45.8b of debt at March 2024, down from CN¥52.7b a year prior. But on the other hand it also has CN¥174.5b in cash, leading to a CN¥128.7b net cash position.

How Strong Is COSCO SHIPPING Holdings' Balance Sheet?

According to the last reported balance sheet, COSCO SHIPPING Holdings had liabilities of CN¥125.0b due within 12 months, and liabilities of CN¥84.4b due beyond 12 months. Offsetting this, it had CN¥174.5b in cash and CN¥12.3b in receivables that were due within 12 months. So it has liabilities totalling CN¥22.5b more than its cash and near-term receivables, combined.

Of course, COSCO SHIPPING Holdings has a titanic market capitalization of CN¥216.5b, 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. 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.

It is just as well that COSCO SHIPPING Holdings's load is not too heavy, because its EBIT was down 83% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While COSCO SHIPPING Holdings does have more liabilities than liquid assets, it also has net cash of CN¥128.7b. The cherry on top was that in converted 112% of that EBIT to free cash flow, bringing in CN¥11b. So we are not troubled with COSCO SHIPPING Holdings's debt use. 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. For example, we've discovered 3 warning signs for COSCO SHIPPING Holdings (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.

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