These 4 Measures Indicate That Ship Healthcare Holdings (TSE:3360) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Ship Healthcare Holdings, Inc. (TSE:3360) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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.

View our latest analysis for Ship Healthcare Holdings

How Much Debt Does Ship Healthcare Holdings Carry?

As you can see below, Ship Healthcare Holdings had JP¥50.0b of debt at June 2024, down from JP¥67.3b a year prior. However, its balance sheet shows it holds JP¥87.0b in cash, so it actually has JP¥37.0b net cash.

How Strong Is Ship Healthcare Holdings' Balance Sheet?

According to the last reported balance sheet, Ship Healthcare Holdings had liabilities of JP¥174.2b due within 12 months, and liabilities of JP¥62.5b due beyond 12 months. Offsetting these obligations, it had cash of JP¥87.0b as well as receivables valued at JP¥113.3b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥36.3b.

Of course, Ship Healthcare Holdings has a market capitalization of JP¥228.2b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Ship Healthcare Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Ship Healthcare Holdings has increased its EBIT by 8.8% over twelve months, which should ease any concerns about debt repayment. 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 Ship Healthcare Holdings 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Ship Healthcare Holdings 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, Ship Healthcare Holdings generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While Ship Healthcare Holdings does have more liabilities than liquid assets, it also has net cash of JP¥37.0b. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in JP¥28b. So is Ship Healthcare Holdings's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Ship Healthcare Holdings's earnings per share history for free.

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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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.