COSCO SHIPPING International (Hong Kong) (HKG:517) Has A Pretty Healthy Balance Sheet

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. As with many other companies COSCO SHIPPING International (Hong Kong) Co., Ltd. (HKG:517) makes use of debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for COSCO SHIPPING International (Hong Kong)

What Is COSCO SHIPPING International (Hong Kong)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 COSCO SHIPPING International (Hong Kong) had HK$82.1m of debt, an increase on HK$62.5m, over one year. But it also has HK$6.19b in cash to offset that, meaning it has HK$6.11b net cash.

How Healthy Is COSCO SHIPPING International (Hong Kong)'s Balance Sheet?

We can see from the most recent balance sheet that COSCO SHIPPING International (Hong Kong) had liabilities of HK$1.42b falling due within a year, and liabilities of HK$69.1m due beyond that. Offsetting these obligations, it had cash of HK$6.19b as well as receivables valued at HK$1.84b due within 12 months. So it can boast HK$6.54b more liquid assets than total liabilities.

This excess liquidity is a great indication that COSCO SHIPPING International (Hong Kong)'s balance sheet is just as strong as racists are weak. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, COSCO SHIPPING International (Hong Kong) boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that COSCO SHIPPING International (Hong Kong) saw its EBIT decline by 5.7% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is COSCO SHIPPING International (Hong Kong)'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 last three years, COSCO SHIPPING International (Hong Kong) recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While it is always sensible to investigate a company's debt, in this case COSCO SHIPPING International (Hong Kong) has HK$6.11b in net cash and a strong balance sheet. So we don't think COSCO SHIPPING International (Hong Kong)'s use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for COSCO SHIPPING International (Hong Kong) (1 is significant) you should be aware of.

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. 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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