We Think Port of Tauranga (NZSE:POT) Can Stay On Top Of Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Port of Tauranga Limited (NZSE:POT) makes use of debt. But should shareholders be worried about its use of debt?

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When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Port of Tauranga's Debt?

You can click the graphic below for the historical numbers, but it shows that Port of Tauranga had NZ$472.6m of debt in December 2024, down from NZ$496.0m, one year before. However, it also had NZ$17.0m in cash, and so its net debt is NZ$455.6m.

How Strong Is Port of Tauranga's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Port of Tauranga had liabilities of NZ$355.9m due within 12 months and liabilities of NZ$361.0m due beyond that. Offsetting these obligations, it had cash of NZ$17.0m as well as receivables valued at NZ$78.8m due within 12 months. So its liabilities total NZ$621.1m more than the combination of its cash and short-term receivables.

Since publicly traded Port of Tauranga shares are worth a total of NZ$4.16b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

Check out our latest analysis for Port of Tauranga

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Port of Tauranga's net debt of 2.1 times EBITDA suggests graceful use of debt. And the fact that its trailing twelve months of EBIT was 7.9 times its interest expenses harmonizes with that theme. One way Port of Tauranga could vanquish its debt would be if it stops borrowing more but continues to grow EBIT at around 12%, as it did over the last year. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Port of Tauranga'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. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Port of Tauranga produced sturdy free cash flow equating to 63% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

Happily, Port of Tauranga's impressive conversion of EBIT to free cash flow implies it has the upper hand on its debt. And its interest cover is good too. We would also note that Infrastructure industry companies like Port of Tauranga commonly do use debt without problems. When we consider the range of factors above, it looks like Port of Tauranga is pretty sensible with its use of debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. Over time, share prices tend to follow earnings per share, so if you're interested in Port of Tauranga, you may well want to click here to check an interactive graph of its earnings per share history.

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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.