These 4 Measures Indicate That ZIM Integrated Shipping Services (NYSE:ZIM) Is Using Debt Extensively

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 ZIM Integrated Shipping Services Ltd. (NYSE:ZIM) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for ZIM Integrated Shipping Services

What Is ZIM Integrated Shipping Services's Debt?

As you can see below, ZIM Integrated Shipping Services had US$113.4m of debt at June 2024, down from US$131.0m a year prior. However, it does have US$1.59b in cash offsetting this, leading to net cash of US$1.48b.

A Look At ZIM Integrated Shipping Services' Liabilities

According to the last reported balance sheet, ZIM Integrated Shipping Services had liabilities of US$2.70b due within 12 months, and liabilities of US$4.11b due beyond 12 months. Offsetting these obligations, it had cash of US$1.59b as well as receivables valued at US$1.03b due within 12 months. So its liabilities total US$4.20b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$2.74b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, ZIM Integrated Shipping Services would probably need a major re-capitalization if its creditors were to demand repayment. Given that ZIM Integrated Shipping Services has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Shareholders should be aware that ZIM Integrated Shipping Services's EBIT was down 81% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if ZIM Integrated Shipping Services 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While ZIM Integrated Shipping Services 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, ZIM Integrated Shipping Services actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although ZIM Integrated Shipping Services's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$1.48b. And it impressed us with free cash flow of US$1.5b, being 109% of its EBIT. Despite its cash we think that ZIM Integrated Shipping Services seems to struggle to grow its EBIT, so we are wary of the stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - ZIM Integrated Shipping Services has 2 warning signs we think you should be aware of.

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.