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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Qingdao Port International Co., Ltd. (HKG:6198) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 step when considering a company's debt levels is to consider its cash and debt 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 September 2023 Qingdao Port International had debt of CN¥3.16b, up from CN¥30.0m in one year. But on the other hand it also has CN¥10.4b in cash, leading to a CN¥7.25b 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¥9.08b falling due within a year, and liabilities of CN¥7.51b due beyond that. Offsetting these obligations, it had cash of CN¥10.4b as well as receivables valued at CN¥3.57b due within 12 months. So it has liabilities totalling CN¥2.61b more than its cash and near-term receivables, combined.

Of course, Qingdao Port International has a market capitalization of CN¥43.4b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Qingdao Port International boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Qingdao Port International grew its EBIT by 11% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Qingdao Port International's ability to maintain a healthy balance sheet going forward. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, Qingdao Port International produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

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¥7.25b in net cash. On top of that, it increased its EBIT by 11% in the last twelve months. So is Qingdao Port International's debt a risk? It doesn't seem so to us. 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. Be aware that Qingdao Port International is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.