Is MPC Container Ships (OB:MPCC) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 can see that MPC Container Ships ASA (OB:MPCC) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for MPC Container Ships

How Much Debt Does MPC Container Ships Carry?

You can click the graphic below for the historical numbers, but it shows that MPC Container Ships had US$126.4m of debt in March 2024, down from US$147.1m, one year before. But it also has US$144.1m in cash to offset that, meaning it has US$17.7m net cash.

How Healthy Is MPC Container Ships' Balance Sheet?

According to the last reported balance sheet, MPC Container Ships had liabilities of US$96.9m due within 12 months, and liabilities of US$89.0m due beyond 12 months. On the other hand, it had cash of US$144.1m and US$26.9m worth of receivables due within a year. So its liabilities total US$14.9m more than the combination of its cash and short-term receivables.

Having regard to MPC Container Ships' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$829.6m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, MPC Container Ships boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that MPC Container Ships saw its EBIT decline by 5.9% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine MPC Container Ships'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. MPC Container Ships 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 last three years, MPC Container Ships recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that MPC Container Ships has US$17.7m in net cash. And it impressed us with free cash flow of US$218m, being 83% of its EBIT. So is MPC Container Ships's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 5 warning signs for MPC Container Ships (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

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