COSCO SHIPPING (HKG: 1199) ports appear to use a lot of debt

Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say this when he says “The biggest risk in investing is not price volatility, but if you will suffer a loss. permanent capital “. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Like many other companies COSCO SHIPPING Ports Limited (HKG: 1199) uses debt. But the most important question is: what risk does this debt create?

When is debt dangerous?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

Check out our latest review for COSCO SHIPPING ports

What is the debt of the COSCO SHIPPING ports?

As you can see below, at the end of September 2021, COSCO SHIPPING Ports had a debt of US $ 2.97 billion, up from US $ 2.83 billion a year ago. Click on the image for more details. However, it has US $ 1.04 billion in cash offsetting this, which leads to net debt of around US $ 1.93 billion.

SEHK: 1199 History of debt to equity November 15, 2021

How strong is the balance sheet of COSCO SHIPPING ports?

According to the latest published balance sheet, COSCO SHIPPING Ports had liabilities of US $ 1.06 billion due within 12 months and liabilities of US $ 3.66 billion due beyond 12 months. In return, he had $ 1.04 billion in cash and $ 294.2 million in receivables due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 3.39 billion.

When you consider that this deficit exceeds the company’s US $ 2.83 billion market cap, you might well be inclined to take a close look at the balance sheet. Hypothetically, extremely high dilution would be required if the company were forced to repay its debts by raising capital at the current share price.

We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). Thus, we consider debt versus earnings with and without amortization expenses.

Low interest coverage of 1.2 times and an extremely high Net Debt to EBITDA ratio of 7.0 affected our confidence in COSCO SHIPPING ports like a punch in the stomach. This means that we would consider him to be in heavy debt. Worse still, COSCO SHIPPING Ports EBIT is down 46% compared to last year. If profits continue to follow this path, it will be more difficult to pay off this debt than to convince us to run a marathon in the rain. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the future profitability of the business will decide whether COSCO SHIPPING Ports can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Finally, while the IRS may love accounting profits, lenders only accept hard cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, COSCO SHIPPING Ports has recorded free cash flow corresponding to 51% of its EBIT, which is close to normal, given that free cash flow excludes interest and taxes. This hard cash allows him to reduce his debt whenever he wants.

Our point of view

To be frank, COSCO SHIPPING Ports’ interest coverage and track record of (not) growing EBIT makes us rather uncomfortable with its debt levels. That said, its ability to convert EBIT into free cash flow is not that much of a concern. We should also note that companies in the infrastructure sector like COSCO SHIPPING Ports generally use debt without a problem. Overall, it seems to us that the balance sheet of COSCO SHIPPING Ports is really very risky for the company. For this reason, we are quite cautious on the stock, and we believe that shareholders should keep a close eye on its liquidity. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. To this end, you should inquire about the 3 warning signs we have spotted COSCO SHIPPING ports (including 1 which makes us a little uncomfortable).

If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow-growing stocks.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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