The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Qingdao Port International Co., Ltd. (HKG:6198) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
We've discovered 2 warning signs about Qingdao Port International. View them for free.When Is Debt A Problem?
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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is Qingdao Port International's Net Debt?
As you can see below, at the end of December 2024, Qingdao Port International had CN¥2.66b of debt, up from CN¥2.29b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥12.7b in cash, so it actually has CN¥10.0b net cash.
A Look At Qingdao Port International's Liabilities
We can see from the most recent balance sheet that Qingdao Port International had liabilities of CN¥8.40b falling due within a year, and liabilities of CN¥7.55b due beyond that. Offsetting this, it had CN¥12.7b in cash and CN¥3.38b in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
Having regard to Qingdao Port International's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥51.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Qingdao Port International has more cash than debt is arguably a good indication that it can manage its debt safely.
View our latest analysis for Qingdao Port International
Fortunately, Qingdao Port International grew its EBIT by 2.6% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Qingdao Port International's ability to maintain a healthy balance sheet going forward. 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 Qingdao Port International 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 most recent three years, Qingdao Port International recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Qingdao Port International has net cash of CN¥10.0b, as well as more liquid assets than liabilities. So is Qingdao Port International's debt a risk? It doesn't seem so to us. 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. Be aware that Qingdao Port International is showing 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.