These 4 Measures Indicate That COSCO SHIPPING Holdings (HKG:1919) Is Using Debt Safely

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that COSCO SHIPPING Holdings Co., Ltd. (HKG:1919) does use debt in its business. But is this debt a concern to shareholders?

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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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does COSCO SHIPPING Holdings Carry?

As you can see below, COSCO SHIPPING Holdings had CN¥46.3b of debt, at March 2025, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥188.0b in cash, leading to a CN¥141.7b net cash position.

A Look At COSCO SHIPPING Holdings' Liabilities

The latest balance sheet data shows that COSCO SHIPPING Holdings had liabilities of CN¥123.1b due within a year, and liabilities of CN¥90.8b falling due after that. Offsetting this, it had CN¥188.0b in cash and CN¥13.8b in receivables that were due within 12 months. So it has liabilities totalling CN¥12.1b more than its cash and near-term receivables, combined.

Given COSCO SHIPPING Holdings has a humongous market capitalization of CN¥226.1b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, COSCO SHIPPING Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for COSCO SHIPPING Holdings

Even more impressive was the fact that COSCO SHIPPING Holdings grew its EBIT by 200% over twelve months. 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, 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. Over the last three years, COSCO SHIPPING Holdings recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that COSCO SHIPPING Holdings has CN¥141.7b in net cash. And it impressed us with free cash flow of CN¥49b, being 87% of its EBIT. So we don't think COSCO SHIPPING Holdings's use of debt is risky. 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. 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 potentially serious!) you should know about.

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.