Hutchison Port Holdings Trust (SGX:NS8U) Has A Pretty Healthy Balance Sheet

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.' 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. Importantly, Hutchison Port Holdings Trust (SGX:NS8U) does carry debt. But is this debt a concern to shareholders?

We've discovered 3 warning signs about Hutchison Port Holdings Trust. View them for free.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

What Is Hutchison Port Holdings Trust's Net Debt?

The chart below, which you can click on for greater detail, shows that Hutchison Port Holdings Trust had HK$25.2b in debt in December 2024; about the same as the year before. However, it also had HK$8.17b in cash, and so its net debt is HK$17.1b.

A Look At Hutchison Port Holdings Trust's Liabilities

Zooming in on the latest balance sheet data, we can see that Hutchison Port Holdings Trust had liabilities of HK$11.3b due within 12 months and liabilities of HK$28.5b due beyond that. On the other hand, it had cash of HK$8.17b and HK$3.36b worth of receivables due within a year. So it has liabilities totalling HK$28.2b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the HK$10.1b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Hutchison Port Holdings Trust would probably need a major re-capitalization if its creditors were to demand repayment.

Check out our latest analysis for Hutchison Port Holdings Trust

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Hutchison Port Holdings Trust has a debt to EBITDA ratio of 2.9 and its EBIT covered its interest expense 5.4 times. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. Importantly, Hutchison Port Holdings Trust grew its EBIT by 31% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Hutchison Port Holdings Trust's ability to maintain a healthy balance sheet going forward. 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. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Hutchison Port Holdings Trust actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

Based on what we've seen Hutchison Port Holdings Trust is not finding it easy, given its level of total liabilities, but the other factors we considered give us cause to be optimistic. There's no doubt that its ability to to convert EBIT to free cash flow is pretty flash. It's also worth noting that Hutchison Port Holdings Trust is in the Infrastructure industry, which is often considered to be quite defensive. When we consider all the factors mentioned above, we do feel a bit cautious about Hutchison Port Holdings Trust's use of debt. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more risky. 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. We've identified 3 warning signs with Hutchison Port Holdings Trust (at least 2 which are significant) , and understanding them should be part of your investment process.

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.