These 4 Measures Indicate That Qingdao Port International (HKG:6198) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Qingdao Port International Co., Ltd. (HKG:6198) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Qingdao Port International

What Is Qingdao Port International's Net Debt?

The image below, which you can click on for greater detail, shows that Qingdao Port International had debt of CN¥1.89b at the end of March 2021, a reduction from CN¥2.68b over a year. But on the other hand it also has CN¥8.56b in cash, leading to a CN¥6.67b net cash position.

How Strong Is Qingdao Port International's Balance Sheet?

We can see from the most recent balance sheet that Qingdao Port International had liabilities of CN¥13.0b falling due within a year, and liabilities of CN¥5.71b due beyond that. On the other hand, it had cash of CN¥8.56b and CN¥7.82b worth of receivables due within a year. So it has liabilities totalling CN¥2.29b more than its cash and near-term receivables, combined.

Since publicly traded Qingdao Port International shares are worth a total of CN¥37.2b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 positive, Qingdao Port International grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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 created free cash flow amounting to 8.0% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

We could understand if investors are concerned about Qingdao Port International's liabilities, but we can be reassured by the fact it has has net cash of CN¥6.67b. And it impressed us with its EBIT growth of 21% over the last year. So we are not troubled with Qingdao Port International's debt use. 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 example, we've discovered 1 warning sign for Qingdao Port International that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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