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. Importantly, Ningbo Ocean Shipping Co., Ltd. (SHSE:601022) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Ningbo Ocean Shipping's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Ningbo Ocean Shipping had debt of CN¥857.0m, up from CN¥516.9m in one year. However, its balance sheet shows it holds CN¥1.49b in cash, so it actually has CN¥633.1m net cash.

How Strong Is Ningbo Ocean Shipping's Balance Sheet?

The latest balance sheet data shows that Ningbo Ocean Shipping had liabilities of CN¥1.89b due within a year, and liabilities of CN¥621.2m falling due after that. Offsetting these obligations, it had cash of CN¥1.49b as well as receivables valued at CN¥1.08b due within 12 months. So it can boast CN¥56.5m more liquid assets than total liabilities.

This state of affairs indicates that Ningbo Ocean Shipping's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥9.72b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Ningbo Ocean Shipping has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Ningbo Ocean Shipping has seen its EBIT plunge 14% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Ningbo Ocean Shipping will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Ningbo Ocean Shipping 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. Considering the last three years, Ningbo Ocean Shipping actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case Ningbo Ocean Shipping has CN¥633.1m in net cash and a decent-looking balance sheet. So we don't have any problem with Ningbo Ocean Shipping's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Ningbo Ocean Shipping that you should be aware of.

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.