Warren Buffett famously said, '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 note that Offshore Oil Engineering Co.,Ltd (SHSE:600583) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Offshore Oil EngineeringLtd

How Much Debt Does Offshore Oil EngineeringLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Offshore Oil EngineeringLtd had CN¥220.0m of debt in September 2023, down from CN¥464.7m, one year before. However, it does have CN¥15.8b in cash offsetting this, leading to net cash of CN¥15.6b.

How Healthy Is Offshore Oil EngineeringLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Offshore Oil EngineeringLtd had liabilities of CN¥16.2b due within 12 months and liabilities of CN¥863.8m due beyond that. Offsetting this, it had CN¥15.8b in cash and CN¥7.22b in receivables that were due within 12 months. So it can boast CN¥5.93b more liquid assets than total liabilities.

It's good to see that Offshore Oil EngineeringLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Offshore Oil EngineeringLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Offshore Oil EngineeringLtd has boosted its EBIT by 65%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Offshore Oil EngineeringLtd 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Offshore Oil EngineeringLtd 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, Offshore Oil EngineeringLtd 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 Offshore Oil EngineeringLtd has net cash of CN¥15.6b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥6.1b, being 342% of its EBIT. When it comes to Offshore Oil EngineeringLtd'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. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Offshore Oil EngineeringLtd .

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.