Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that CNOOC Energy Technology & Services Limited (SHSE:600968) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is CNOOC Energy Technology & Services's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 CNOOC Energy Technology & Services had CN¥2.55b of debt, an increase on CN¥2.13b, over one year. However, it does have CN¥8.62b in cash offsetting this, leading to net cash of CN¥6.07b.

How Strong Is CNOOC Energy Technology & Services' Balance Sheet?

We can see from the most recent balance sheet that CNOOC Energy Technology & Services had liabilities of CN¥15.5b falling due within a year, and liabilities of CN¥3.63b due beyond that. On the other hand, it had cash of CN¥8.62b and CN¥14.0b worth of receivables due within a year. So it can boast CN¥3.47b more liquid assets than total liabilities.

This short term liquidity is a sign that CNOOC Energy Technology & Services could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that CNOOC Energy Technology & Services has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, CNOOC Energy Technology & Services grew its EBIT by 36% over the last twelve months, and that growth will make it easier to handle its 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 CNOOC Energy Technology & Services 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 CNOOC Energy Technology & 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. During the last three years, CNOOC Energy Technology & Services produced sturdy free cash flow equating to 79% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case CNOOC Energy Technology & Services has CN¥6.07b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 36% over the last year. So we don't think CNOOC Energy Technology & Services's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of CNOOC Energy Technology & Services's earnings per share history for free.

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.