Wisdom Marine Lines Limited (Cayman) (TWSE:2637) Seems To Use Debt Quite Sensibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Wisdom Marine Lines Co., Limited (Cayman) (TWSE:2637) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Wisdom Marine Lines Limited (Cayman)

What Is Wisdom Marine Lines Limited (Cayman)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that Wisdom Marine Lines Limited (Cayman) had US$1.05b of debt in September 2024, down from US$1.17b, one year before. On the flip side, it has US$133.9m in cash leading to net debt of about US$912.3m.

How Healthy Is Wisdom Marine Lines Limited (Cayman)'s Balance Sheet?

According to the last reported balance sheet, Wisdom Marine Lines Limited (Cayman) had liabilities of US$320.3m due within 12 months, and liabilities of US$985.2m due beyond 12 months. On the other hand, it had cash of US$133.9m and US$10.5m worth of receivables due within a year. So its liabilities total US$1.16b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$1.54b, so it does suggest shareholders should keep an eye on Wisdom Marine Lines Limited (Cayman)'s use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

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.

Wisdom Marine Lines Limited (Cayman) has a debt to EBITDA ratio of 2.7 and its EBIT covered its interest expense 3.8 times. Taken together this implies that, while we wouldn't want to see debt levels rise, we think it can handle its current leverage. The good news is that Wisdom Marine Lines Limited (Cayman) grew its EBIT a smooth 94% over the last twelve months. Like a mother's loving embrace of a newborn that sort of growth builds resilience, putting the company in a stronger position to manage 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 Wisdom Marine Lines Limited (Cayman)'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. Over the most recent three years, Wisdom Marine Lines Limited (Cayman) recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Wisdom Marine Lines Limited (Cayman)'s EBIT growth rate was a real positive on this analysis, as was its conversion of EBIT to free cash flow. Having said that, its level of total liabilities somewhat sensitizes us to potential future risks to the balance sheet. When we consider all the elements mentioned above, it seems to us that Wisdom Marine Lines Limited (Cayman) is managing its debt quite well. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Wisdom Marine Lines Limited (Cayman) (1 is a bit concerning) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.