ZIM Integrated Shipping Services (NYSE:ZIM) 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.' 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. We can see that ZIM Integrated Shipping Services Ltd. (NYSE:ZIM) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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, 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 ZIM Integrated Shipping Services

What Is ZIM Integrated Shipping Services's Debt?

As you can see below, ZIM Integrated Shipping Services had US$125.8m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has US$2.32b in cash to offset that, meaning it has US$2.19b net cash.

A Look At ZIM Integrated Shipping Services' Liabilities

Zooming in on the latest balance sheet data, we can see that ZIM Integrated Shipping Services had liabilities of US$2.69b due within 12 months and liabilities of US$4.40b due beyond that. On the other hand, it had cash of US$2.32b and US$1.06b worth of receivables due within a year. So its liabilities total US$3.71b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$2.18b 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. After all, ZIM Integrated Shipping Services would likely require a major re-capitalisation if it had to pay its creditors today. 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.

Even more impressive was the fact that ZIM Integrated Shipping Services grew its EBIT by 1,346% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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$2.19b. And it impressed us with free cash flow of US$2.6b, being 113% of its EBIT. So we are not troubled with ZIM Integrated Shipping Services's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for ZIM Integrated Shipping Services (of which 1 can't be ignored!) you should know about.

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.