Is COSCO SHIPPING Holdings (HKG:1919) Using Too Much Debt?

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 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. Importantly, COSCO SHIPPING Holdings Co., Ltd. (HKG:1919) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for COSCO SHIPPING Holdings

How Much Debt Does COSCO SHIPPING Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that COSCO SHIPPING Holdings had CN¥52.1b of debt in September 2023, down from CN¥66.9b, one year before. But on the other hand it also has CN¥199.1b in cash, leading to a CN¥146.9b net cash position.

How Healthy Is COSCO SHIPPING Holdings' Balance Sheet?

We can see from the most recent balance sheet that COSCO SHIPPING Holdings had liabilities of CN¥134.1b falling due within a year, and liabilities of CN¥94.4b due beyond that. Offsetting these obligations, it had cash of CN¥199.1b as well as receivables valued at CN¥11.0b due within 12 months. So it has liabilities totalling CN¥18.4b more than its cash and near-term receivables, combined.

Of course, COSCO SHIPPING Holdings has a titanic market capitalization of CN¥149.4b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, COSCO SHIPPING Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that COSCO SHIPPING Holdings's load is not too heavy, because its EBIT was down 72% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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¥146.9b. The cherry on top was that in converted 119% of that EBIT to free cash flow, bringing in CN¥34b. So we are not troubled with COSCO SHIPPING Holdings's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 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.