Yang Ming Marine Transport (TWSE:2609) Could Easily Take On More 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.' 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. We can see that Yang Ming Marine Transport Corporation (TWSE:2609) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Yang Ming Marine Transport

What Is Yang Ming Marine Transport's Debt?

The image below, which you can click on for greater detail, shows that Yang Ming Marine Transport had debt of NT$9.92b at the end of September 2024, a reduction from NT$14.4b over a year. But on the other hand it also has NT$213.4b in cash, leading to a NT$203.4b net cash position.

A Look At Yang Ming Marine Transport's Liabilities

The latest balance sheet data shows that Yang Ming Marine Transport had liabilities of NT$50.6b due within a year, and liabilities of NT$57.0b falling due after that. Offsetting this, it had NT$213.4b in cash and NT$17.8b in receivables that were due within 12 months. So it actually has NT$123.5b more liquid assets than total liabilities.

This excess liquidity is a great indication that Yang Ming Marine Transport's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Yang Ming Marine Transport boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Yang Ming Marine Transport grew its EBIT by 140% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Yang Ming Marine Transport 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Yang Ming Marine Transport 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, Yang Ming Marine Transport 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 Yang Ming Marine Transport has net cash of NT$203.4b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$57b, being 93% of its EBIT. At the end of the day we're not concerned about Yang Ming Marine Transport's debt. 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. To that end, you should learn about the 2 warning signs we've spotted with Yang Ming Marine Transport (including 1 which doesn't sit too well with us) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.