COSCO SHIPPING International (Hong Kong) (HKG:517) Could Easily Take On More 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 COSCO SHIPPING International (Hong Kong) Co., Ltd. (HKG:517) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 COSCO SHIPPING International (Hong Kong)

How Much Debt Does COSCO SHIPPING International (Hong Kong) Carry?

As you can see below, at the end of December 2020, COSCO SHIPPING International (Hong Kong) had HK$89.1m of debt, up from HK$61.4m a year ago. Click the image for more detail. However, it does have HK$6.51b in cash offsetting this, leading to net cash of HK$6.42b.

A Look At COSCO SHIPPING International (Hong Kong)'s Liabilities

Zooming in on the latest balance sheet data, we can see that COSCO SHIPPING International (Hong Kong) had liabilities of HK$1.42b due within 12 months and liabilities of HK$89.4m due beyond that. Offsetting this, it had HK$6.51b in cash and HK$1.11b in receivables that were due within 12 months. So it actually has HK$6.10b more liquid assets than total liabilities.

This surplus strongly suggests that COSCO SHIPPING International (Hong Kong) has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, COSCO SHIPPING International (Hong Kong) boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that COSCO SHIPPING International (Hong Kong) has increased its EBIT by 4.5% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since COSCO SHIPPING International (Hong Kong) will need earnings to service that debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While COSCO SHIPPING International (Hong Kong) 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 most recent three years, COSCO SHIPPING International (Hong Kong) recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, the bottom line is that COSCO SHIPPING International (Hong Kong) has net cash of HK$6.42b and plenty of liquid assets. The cherry on top was that in converted 75% of that EBIT to free cash flow, bringing in HK$261m. The bottom line is that we do not find COSCO SHIPPING International (Hong Kong)'s debt levels at all concerning. 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. For instance, we've identified 1 warning sign for COSCO SHIPPING International (Hong Kong) that you should be aware of.

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. 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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