Yang Ming Marine Transport (TWSE:2609) Seems To Use Debt Rather Sparingly

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 note that Yang Ming Marine Transport Corporation (TWSE:2609) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Yang Ming Marine Transport's Debt?

You can click the graphic below for the historical numbers, but it shows that Yang Ming Marine Transport had NT$9.92b of debt in September 2024, down from NT$14.4b, one year before. However, it does have NT$213.4b in cash offsetting this, leading to net cash of NT$203.4b.

How Strong Is Yang Ming Marine Transport's Balance Sheet?

According to the last reported balance sheet, Yang Ming Marine Transport had liabilities of NT$50.6b due within 12 months, and liabilities of NT$57.0b due beyond 12 months. Offsetting these obligations, it had cash of NT$213.4b as well as receivables valued at NT$17.8b 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. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Yang Ming Marine Transport has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Yang Ming Marine Transport

Better yet, Yang Ming Marine Transport grew its EBIT by 140% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 Yang Ming Marine Transport'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last three years, Yang Ming Marine Transport generated free cash flow amounting to a very robust 93% of its EBIT, more than we'd 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Yang Ming Marine Transport you should be aware of, and 1 of them can't be ignored.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.