David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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, 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 Ningbo Ocean Shipping's Net Debt?

As you can see below, at the end of September 2024, Ningbo Ocean Shipping had CN¥560.3m of debt, up from CN¥525.7m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.21b in cash, so it actually has CN¥647.8m net cash.

How Healthy Is Ningbo Ocean Shipping's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ningbo Ocean Shipping had liabilities of CN¥2.27b due within 12 months and liabilities of CN¥197.3m due beyond that. Offsetting these obligations, it had cash of CN¥1.21b as well as receivables valued at CN¥1.35b due within 12 months. So it can boast CN¥91.9m 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 it's very unlikely that the CN¥10.1b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Ningbo Ocean Shipping boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Ningbo Ocean Shipping has increased its EBIT by 2.4% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. 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. Ningbo Ocean Shipping may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Ningbo Ocean Shipping recorded negative free cash flow, in total. 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¥647.8m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 2.4% over the last year. So we are not troubled with Ningbo Ocean Shipping's debt use. There's no doubt that we learn most about debt from the balance sheet. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.