We Think OSG Corporation (TYO:6757) Can Manage Its Debt With Ease

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, OSG Corporation Co., Ltd. (TYO:6757) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for OSG Corporation

What Is OSG Corporation's Debt?

The image below, which you can click on for greater detail, shows that OSG Corporation had debt of JP¥1.41b at the end of October 2020, a reduction from JP¥1.52b over a year. However, its balance sheet shows it holds JP¥2.78b in cash, so it actually has JP¥1.38b net cash.

A Look At OSG Corporation's Liabilities

According to the last reported balance sheet, OSG Corporation had liabilities of JP¥2.67b due within 12 months, and liabilities of JP¥785.0m due beyond 12 months. On the other hand, it had cash of JP¥2.78b and JP¥1.21b worth of receivables due within a year. So it actually has JP¥542.0m more liquid assets than total liabilities.

This short term liquidity is a sign that OSG Corporation could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that OSG Corporation has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, OSG Corporation grew its EBIT by 119% 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 OSG Corporation 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 company can only pay off debt with cold hard cash, not accounting profits. While OSG Corporation has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, OSG Corporation recorded free cash flow worth a fulsome 93% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that OSG Corporation has net cash of JP¥1.38b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥1.0b, being 93% of its EBIT. So we don't think OSG Corporation's use of debt is risky. 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. We've identified 3 warning signs with OSG Corporation , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

If you’re looking to trade OSG Corporation, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.