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.' 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 COSCO SHIPPING Energy Transportation Co., Ltd. (HKG:1138) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for COSCO SHIPPING Energy Transportation

What Is COSCO SHIPPING Energy Transportation's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 COSCO SHIPPING Energy Transportation had debt of CN¥25.6b, up from CN¥22.9b in one year. However, because it has a cash reserve of CN¥3.58b, its net debt is less, at about CN¥22.0b.

A Look At COSCO SHIPPING Energy Transportation's Liabilities

According to the last reported balance sheet, COSCO SHIPPING Energy Transportation had liabilities of CN¥13.2b due within 12 months, and liabilities of CN¥18.7b due beyond 12 months. Offsetting this, it had CN¥3.58b in cash and CN¥2.53b in receivables that were due within 12 months. So its liabilities total CN¥25.8b more than the combination of its cash and short-term receivables.

COSCO SHIPPING Energy Transportation has a market capitalization of CN¥65.4b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if COSCO SHIPPING Energy Transportation can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, COSCO SHIPPING Energy Transportation reported revenue of CN¥14b, which is a gain of 11%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, COSCO SHIPPING Energy Transportation had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥291m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CN¥5.4b. So we do think this stock is quite risky. 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. We've identified 2 warning signs with COSCO SHIPPING Energy Transportation (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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.