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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Orient Overseas (International) Limited (HKG:316) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Orient Overseas (International)

How Much Debt Does Orient Overseas (International) Carry?

The image below, which you can click on for greater detail, shows that Orient Overseas (International) had debt of US$231.3m at the end of June 2022, a reduction from US$929.0m over a year. However, it does have US$11.0b in cash offsetting this, leading to net cash of US$10.8b.

How Healthy Is Orient Overseas (International)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Orient Overseas (International) had liabilities of US$4.15b due within 12 months and liabilities of US$2.64b due beyond that. On the other hand, it had cash of US$11.0b and US$1.08b worth of receivables due within a year. So it can boast US$5.30b more liquid assets than total liabilities.

This surplus strongly suggests that Orient Overseas (International) has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Orient Overseas (International) boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Orient Overseas (International) grew its EBIT by 181% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Orient Overseas (International) 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, a company can only pay off debt with cold hard cash, not accounting profits. Orient Overseas (International) may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Orient Overseas (International) actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Orient Overseas (International) has net cash of US$10.8b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$12b, being 115% of its EBIT. The bottom line is that Orient Overseas (International)'s use of debt is absolutely fine. 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 Orient Overseas (International) has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.