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, A.P. Møller – Mærsk A/S (CPH:MAERSK B) does carry debt. But is this debt a concern to shareholders?
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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for A.P. Møller – Mærsk
The image below, which you can click on for greater detail, shows that A.P. Møller – Mærsk had debt of US$4.18b at the end of June 2022, a reduction from US$5.09b over a year. However, it does have US$9.73b in cash offsetting this, leading to net cash of US$5.55b.
We can see from the most recent balance sheet that A.P. Møller – Mærsk had liabilities of US$13.0b falling due within a year, and liabilities of US$14.8b due beyond that. Offsetting these obligations, it had cash of US$9.73b as well as receivables valued at US$18.9b due within 12 months. So it actually has US$820.0m more liquid assets than total liabilities.
This short term liquidity is a sign that A.P. Møller – Mærsk could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that A.P. Møller – Mærsk has more cash than debt is arguably a good indication that it can manage its debt safely.
Even more impressive was the fact that A.P. Møller – Mærsk grew its EBIT by 201% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if A.P. Møller – Mærsk can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. A.P. Møller – Mærsk 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, A.P. Møller – Mærsk actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
While it is always sensible to investigate a company's debt, in this case A.P. Møller – Mærsk has US$5.55b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$27b, being 104% of its EBIT. So we don't think A.P. Møller – Mærsk's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for A.P. Møller – Mærsk (of which 1 can't be ignored!) you should know about.
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.
Find out whether A.P. Møller – Mærsk is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
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A.P. Møller – Mærsk A/S operates as an integrated transport and logistics company worldwide.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Flawless balance sheet, undervalued and pays a dividend.
Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.
A.P. Møller – Mærsk A/S operates as an integrated transport and logistics company worldwide.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Flawless balance sheet, undervalued and pays a dividend.
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