COSCO SHIPPING Holdings (HKG: 1919) seems to use its debts sparingly

Warren Buffett said: “Volatility is far from synonymous with risk”. It is only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. We notice that COSCO SHIPPING Holdings Co., Ltd. (HKG: 1919) has debt on its balance sheet. But does this debt worry shareholders?

What risk does debt entail?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

See our latest analysis for COSCO SHIPPING Holdings

What is the debt of COSCO SHIPPING Holdings?

As you can see below, COSCO SHIPPING Holdings had a debt of CNN 92.0 billion in September 2021, up from CNN 110.3 billion the previous year. But it also has CN 145.2 billion in cash to compensate for this, which means it has a net cash position of CN 53.2 billion.

SEHK: 1919 History of debt to equity December 31, 2021

How strong is COSCO SHIPPING Holdings’ balance sheet?

According to the latest published balance sheet, COSCO SHIPPING Holdings had liabilities of 101.8 billion yen due within 12 months and commitments of 119.2 billion yen due beyond 12 months. In return, he had CNN 145.2 billion in cash and CNN 17.0 billion in receivables due within 12 months. It therefore has liabilities totaling CNN 58.8 billion more than its cash and short-term receivables combined.

This deficit is not that big as COSCO SHIPPING Holdings is worth a whopping CN ¥ 278.0b, and therefore could possibly raise enough capital to consolidate its balance sheet, should the need arise. But we absolutely want to keep our eyes open for indications that its debt is too risky. Despite its notable liabilities, COSCO SHIPPING Holdings has net cash, so it’s fair to say that it doesn’t have a heavy debt load!

Best of all, COSCO SHIPPING Holdings increased its EBIT by 1,206% last year, which is an impressive improvement. If sustained, this growth will make debt even more manageable in the years to come. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the future profitability of the business will decide whether COSCO SHIPPING Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.

Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. Although COSCO SHIPPING Holdings has net cash on its balance sheet, it is still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it is building. (or erode) that cash balance. Fortunately for all shareholders, COSCO SHIPPING Holdings has actually generated more free cash flow than EBIT over the past three years. This kind of solid silver generation warms our hearts like a puppy in a bumblebee costume.

In summary

While COSCO SHIPPING Holdings’ balance sheet is not particularly strong, due to total liabilities it is clearly positive to see that it has a net cash position of 53.2 billion yen. The icing on the cake was that he converted 133% of that EBIT into free cash flow, which brought in CNN 128 billion. We therefore do not believe that the use of debt by COSCO SHIPPING Holdings is risky. When analyzing debt levels, the balance sheet is the obvious place to start. However, not all investment risks lie on the balance sheet – far from it. We have identified 2 warning signs with COSCO SHIPPING Holdings (at least 1 which makes us a little uncomfortable), and understanding them should be part of your investment process.

Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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