The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Ningbo Ocean Shipping Co., Ltd. (SHSE:601022) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Ningbo Ocean Shipping's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2024 Ningbo Ocean Shipping had CN¥665.7m of debt, an increase on CN¥557.1m, over one year. However, its balance sheet shows it holds CN¥1.17b in cash, so it actually has CN¥506.2m net cash.
How Strong Is Ningbo Ocean Shipping's Balance Sheet?
The latest balance sheet data shows that Ningbo Ocean Shipping had liabilities of CN¥1.39b due within a year, and liabilities of CN¥610.7m falling due after that. Offsetting this, it had CN¥1.17b in cash and CN¥1.01b in receivables that were due within 12 months. So it can boast CN¥182.2m more liquid assets than total liabilities.
This state of affairs indicates that Ningbo Ocean Shipping's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥13.2b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Ningbo Ocean Shipping has more cash than debt is arguably a good indication that it can manage its debt safely.
In fact Ningbo Ocean Shipping's saving grace is its low debt levels, because its EBIT has tanked 31% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ningbo Ocean Shipping's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Ningbo Ocean Shipping 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, Ningbo Ocean Shipping burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing Up
While it is always sensible to investigate a company's debt, in this case Ningbo Ocean Shipping has CN¥506.2m in net cash and a decent-looking balance sheet. So while Ningbo Ocean Shipping does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Ningbo Ocean Shipping (including 1 which is potentially serious) .
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.