Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, ZIM Integrated Shipping Services Ltd. (NYSE:ZIM) does carry debt. But the real question is whether this debt is making the company risky.
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 examine debt levels, we first consider both cash and debt levels, together.
What Is ZIM Integrated Shipping Services's Net Debt?
You can click the graphic below for the historical numbers, but it shows that ZIM Integrated Shipping Services had US$127.4m of debt in September 2023, down from US$239.9m, one year before. But it also has US$1.83b in cash to offset that, meaning it has US$1.70b net cash.
How Strong Is ZIM Integrated Shipping Services' Balance Sheet?
According to the last reported balance sheet, ZIM Integrated Shipping Services had liabilities of US$2.54b due within 12 months, and liabilities of US$3.08b due beyond 12 months. Offsetting this, it had US$1.83b in cash and US$644.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$3.15b.
The deficiency here weighs heavily on the US$1.43b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, ZIM Integrated Shipping Services would likely require a major re-capitalisation if it had to pay its creditors today. ZIM Integrated Shipping Services boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.
Shareholders should be aware that ZIM Integrated Shipping Services's EBIT was down 98% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ZIM Integrated Shipping Services 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. While ZIM Integrated Shipping Services 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. Over the last three years, ZIM Integrated Shipping Services recorded free cash flow worth a fulsome 100% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.
Summing Up
Although ZIM Integrated Shipping Services's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$1.70b. And it impressed us with free cash flow of US$1.8b, being 100% of its EBIT. Despite the cash, we do find ZIM Integrated Shipping Services's level of total liabilities concerning, so we're not particularly comfortable with the stock. The balance sheet is clearly the area to focus on when you are analysing debt. 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 ZIM Integrated Shipping Services .
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.