We Think COSCO SHIPPING Holdings (HKG:1919) Can Stay On Top Of Its Debt

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.' 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 can see that COSCO SHIPPING Holdings Co., Ltd. (HKG:1919) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. 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

What Is COSCO SHIPPING Holdings's Debt?

The image below, which you can click on for greater detail, shows that COSCO SHIPPING Holdings had debt of CN¥52.1b at the end of September 2023, a reduction from CN¥66.9b over a year. 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?

The latest balance sheet data shows that COSCO SHIPPING Holdings had liabilities of CN¥134.1b due within a year, and liabilities of CN¥94.4b falling due after 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 its liabilities total CN¥18.4b more than the combination of its cash and short-term receivables.

Given COSCO SHIPPING Holdings has a humongous market capitalization of CN¥159.6b, it's hard to believe these liabilities pose much 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.

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. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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, 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. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although COSCO SHIPPING Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it 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. 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. For example COSCO SHIPPING Holdings has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.