We Think Qingdao Port International (HKG:6198) Can Stay On Top Of Its Debt

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.' 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 Qingdao Port International Co., Ltd. (HKG:6198) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Qingdao Port International

What Is Qingdao Port International's Debt?

You can click the graphic below for the historical numbers, but it shows that Qingdao Port International had CN¥30.0m of debt in September 2022, down from CN¥1.45b, one year before. But it also has CN¥8.92b in cash to offset that, meaning it has CN¥8.89b net cash.

How Healthy Is Qingdao Port International's Balance Sheet?

The latest balance sheet data shows that Qingdao Port International had liabilities of CN¥15.3b due within a year, and liabilities of CN¥5.88b falling due after that. Offsetting this, it had CN¥8.92b in cash and CN¥6.09b in receivables that were due within 12 months. So its liabilities total CN¥6.14b more than the combination of its cash and short-term receivables.

Given Qingdao Port International has a market capitalization of CN¥37.5b, it's hard to believe these liabilities pose much 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.

On the other hand, Qingdao Port International saw its EBIT drop by 4.3% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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. Looking at the most recent three years, Qingdao Port International recorded free cash flow of 31% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Qingdao Port International does have more liabilities than liquid assets, it also has net cash of CN¥8.89b. So we don't have any problem with Qingdao Port International's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Qingdao Port International is showing 1 warning sign in our investment analysis , you should know about...

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. 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.