We Think Liaoning PortLtd (HKG:2880) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Liaoning Port Co.,Ltd. (HKG:2880) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Liaoning PortLtd

What Is Liaoning PortLtd's Net Debt?

As you can see below, Liaoning PortLtd had CN¥4.85b of debt at September 2021, down from CN¥7.48b a year prior. However, it does have CN¥6.10b in cash offsetting this, leading to net cash of CN¥1.25b.

How Strong Is Liaoning PortLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Liaoning PortLtd had liabilities of CN¥3.01b due within 12 months and liabilities of CN¥11.3b due beyond that. Offsetting these obligations, it had cash of CN¥6.10b as well as receivables valued at CN¥3.90b due within 12 months. So its liabilities total CN¥4.28b more than the combination of its cash and short-term receivables.

Since publicly traded Liaoning PortLtd shares are worth a total of CN¥32.2b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Liaoning PortLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Liaoning PortLtd's saving grace is its low debt levels, because its EBIT has tanked 60% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is Liaoning PortLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Liaoning PortLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Liaoning PortLtd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although Liaoning PortLtd'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¥1.25b. And it impressed us with free cash flow of CN¥1.2b, being 104% of its EBIT. So we don't have any problem with Liaoning PortLtd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Liaoning PortLtd you should be aware of, and 1 of them can't be ignored.

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.

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.

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