We Think Cochin Shipyard (NSE:COCHINSHIP) Can Manage Its Debt With Ease

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. As with many other companies Cochin Shipyard Limited (NSE:COCHINSHIP) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Cochin Shipyard

What Is Cochin Shipyard's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Cochin Shipyard had ₹5.02b of debt in March 2024, down from ₹5.87b, one year before. However, it does have ₹38.6b in cash offsetting this, leading to net cash of ₹33.6b.

How Strong Is Cochin Shipyard's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cochin Shipyard had liabilities of ₹65.2b due within 12 months and liabilities of ₹5.23b due beyond that. On the other hand, it had cash of ₹38.6b and ₹20.5b worth of receivables due within a year. So its liabilities total ₹11.2b more than the combination of its cash and short-term receivables.

Given Cochin Shipyard has a market capitalization of ₹478.0b, 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. Despite its noteworthy liabilities, Cochin Shipyard boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Cochin Shipyard grew its EBIT by 280% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Cochin Shipyard can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Cochin Shipyard 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. Over the most recent three years, Cochin Shipyard recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Cochin Shipyard has ₹33.6b in net cash. And we liked the look of last year's 280% year-on-year EBIT growth. So we don't think Cochin Shipyard's use of debt is risky. 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 Cochin Shipyard 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.