These 4 Measures Indicate That Pacific Basin Shipping (HKG:2343) Is Using Debt Reasonably Well

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.' 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 note that Pacific Basin Shipping Limited (HKG:2343) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

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.

What Is Pacific Basin Shipping's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Pacific Basin Shipping had US$262.3m of debt in December 2024, down from US$300.4m, one year before. But on the other hand it also has US$282.0m in cash, leading to a US$19.7m net cash position.

How Healthy Is Pacific Basin Shipping's Balance Sheet?

The latest balance sheet data shows that Pacific Basin Shipping had liabilities of US$349.0m due within a year, and liabilities of US$238.4m falling due after that. On the other hand, it had cash of US$282.0m and US$130.2m worth of receivables due within a year. So it has liabilities totalling US$175.2m more than its cash and near-term receivables, combined.

Of course, Pacific Basin Shipping has a market capitalization of US$1.16b, 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, Pacific Basin Shipping boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Pacific Basin Shipping

The good news is that Pacific Basin Shipping has increased its EBIT by 4.0% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Pacific Basin Shipping'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 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. Happily for any shareholders, Pacific Basin Shipping actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Pacific Basin Shipping does have more liabilities than liquid assets, it also has net cash of US$19.7m. And it impressed us with free cash flow of US$181m, being 116% 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. To that end, you should be aware of the 1 warning sign we've spotted with Pacific Basin Shipping .

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.