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.' 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. We can see that Samudera Shipping Line Ltd (SGX:S56) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Samudera Shipping Line

What Is Samudera Shipping Line's Debt?

You can click the graphic below for the historical numbers, but it shows that Samudera Shipping Line had US$26.1m of debt in June 2022, down from US$28.8m, one year before. However, it does have US$245.1m in cash offsetting this, leading to net cash of US$219.0m.

How Healthy Is Samudera Shipping Line's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Samudera Shipping Line had liabilities of US$229.4m due within 12 months and liabilities of US$116.6m due beyond that. On the other hand, it had cash of US$245.1m and US$192.0m worth of receivables due within a year. So it can boast US$91.1m more liquid assets than total liabilities.

This surplus suggests that Samudera Shipping Line is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Samudera Shipping Line has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Samudera Shipping Line grew its EBIT by 466% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Samudera Shipping Line will need earnings to service that debt. 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 Samudera Shipping Line 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. Happily for any shareholders, Samudera Shipping Line actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Samudera Shipping Line has net cash of US$219.0m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$244m, being 100% of its EBIT. When it comes to Samudera Shipping Line's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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 example, we've discovered 2 warning signs for Samudera Shipping Line that you should be aware of before investing here.

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.