Watts International Maritime Engineering (HKG:2258) Seems To Use Debt Rather Sparingly
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. As with many other companies Watts International Maritime Engineering Limited (HKG:2258) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Watts International Maritime Engineering
How Much Debt Does Watts International Maritime Engineering Carry?
As you can see below, at the end of June 2019, Watts International Maritime Engineering had CN¥20.0m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥457.2m in cash, leading to a CN¥437.2m net cash position.
How Healthy Is Watts International Maritime Engineering's Balance Sheet?
The latest balance sheet data shows that Watts International Maritime Engineering had liabilities of CN¥1.54b due within a year, and liabilities of CN¥34.8m falling due after that. Offsetting these obligations, it had cash of CN¥457.2m as well as receivables valued at CN¥1.49b due within 12 months. So it actually has CN¥372.5m more liquid assets than total liabilities.
This surplus strongly suggests that Watts International Maritime Engineering has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Simply put, the fact that Watts International Maritime Engineering has more cash than debt is arguably a good indication that it can manage its debt safely.
The good news is that Watts International Maritime Engineering has increased its EBIT by 9.7% 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 Watts International Maritime Engineering 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, a company can only pay off debt with cold hard cash, not accounting profits. Watts International Maritime Engineering 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. In the last three years, Watts International Maritime Engineering's free cash flow amounted to 50% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.
Summing up
While it is always sensible to investigate a company's debt, in this case Watts International Maritime Engineering has CN¥437.2m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 9.7% over the last year. So is Watts International Maritime Engineering's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Watts International Maritime Engineering is showing 1 warning sign in our investment analysis , you should know about...
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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