Qingdao Port International (HKG:6198) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Qingdao Port International Co., Ltd. (HKG:6198) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Qingdao Port International

What Is Qingdao Port International's Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Qingdao Port International had debt of CN¥2.49b, up from CN¥1.45b in one year. However, its balance sheet shows it holds CN¥10.8b in cash, so it actually has CN¥8.29b net cash.

How Strong Is Qingdao Port International's Balance Sheet?

According to the last reported balance sheet, Qingdao Port International had liabilities of CN¥8.41b due within 12 months, and liabilities of CN¥7.92b due beyond 12 months. On the other hand, it had cash of CN¥10.8b and CN¥3.75b worth of receivables due within a year. So its liabilities total CN¥1.79b more than the combination of its cash and short-term receivables.

Since publicly traded Qingdao Port International shares are worth a total of CN¥41.2b, it seems unlikely that this level of liabilities would be a major threat. 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, Qingdao Port International also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Qingdao Port International grew its EBIT at 14% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Qingdao Port International 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Qingdao Port International 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. In the last three years, Qingdao Port International's free cash flow amounted to 34% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Qingdao Port International has CN¥8.29b in net cash. On top of that, it increased its EBIT by 14% in the last twelve months. So we don't think Qingdao Port International'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. To that end, you should be aware of the 1 warning sign we've spotted with Qingdao Port International .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.