Pacific Basin Shipping (HKG:2343) Seems To Use Debt Rather Sparingly

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. We note that Pacific Basin Shipping Limited (HKG:2343) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

Check out our latest analysis for Pacific Basin Shipping

What Is Pacific Basin Shipping's Debt?

The image below, which you can click on for greater detail, shows that Pacific Basin Shipping had debt of US$447.5m at the end of June 2022, a reduction from US$771.6m over a year. But it also has US$516.3m in cash to offset that, meaning it has US$68.8m net cash.

How Healthy Is Pacific Basin Shipping's Balance Sheet?

According to the last reported balance sheet, Pacific Basin Shipping had liabilities of US$417.3m due within 12 months, and liabilities of US$430.5m due beyond 12 months. On the other hand, it had cash of US$516.3m and US$179.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$151.9m.

Of course, Pacific Basin Shipping has a market capitalization of US$1.80b, 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, Pacific Basin Shipping also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Pacific Basin Shipping grew its EBIT by 395% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Pacific Basin Shipping 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 Pacific Basin Shipping 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, Pacific Basin Shipping recorded free cash flow worth a fulsome 99% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Pacific Basin Shipping has US$68.8m in net cash. And it impressed us with free cash flow of US$996m, being 99% of its EBIT. So is Pacific Basin Shipping'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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Pacific Basin Shipping you should be aware of, and 1 of them doesn't sit too well with us.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.