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.' 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. Importantly, Offshore Oil Engineering Co.,Ltd (SHSE:600583) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Offshore Oil EngineeringLtd's Debt?
As you can see below, Offshore Oil EngineeringLtd had CN¥220.0m of debt at December 2023, down from CN¥759.0m a year prior. However, its balance sheet shows it holds CN¥13.7b in cash, so it actually has CN¥13.5b net cash.
How Strong Is Offshore Oil EngineeringLtd's Balance Sheet?
We can see from the most recent balance sheet that Offshore Oil EngineeringLtd had liabilities of CN¥15.6b falling due within a year, and liabilities of CN¥844.5m due beyond that. On the other hand, it had cash of CN¥13.7b and CN¥8.97b worth of receivables due within a year. So it can boast CN¥6.22b more liquid assets than total liabilities.
This surplus suggests that Offshore Oil EngineeringLtd is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Offshore Oil EngineeringLtd boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Offshore Oil EngineeringLtd has boosted its EBIT by 45%, thus reducing the spectre of future debt repayments. 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 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, Offshore Oil EngineeringLtd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing Up
While it is always sensible to investigate a company's debt, in this case Offshore Oil EngineeringLtd has CN¥13.5b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥4.3b, being 286% 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Offshore Oil EngineeringLtd that you should be aware of.
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.