Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, SINOMACH HEAVY EQUIPMENT GROUP CO.,LTD (SHSE:601399) does carry debt. But the more important question is: how much risk is that debt creating?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for SINOMACH HEAVY EQUIPMENT GROUPLTD
As you can see below, SINOMACH HEAVY EQUIPMENT GROUPLTD had CN¥2.97b of debt at June 2024, down from CN¥3.41b a year prior. But it also has CN¥7.46b in cash to offset that, meaning it has CN¥4.49b net cash.
Zooming in on the latest balance sheet data, we can see that SINOMACH HEAVY EQUIPMENT GROUPLTD had liabilities of CN¥12.9b due within 12 months and liabilities of CN¥3.36b due beyond that. On the other hand, it had cash of CN¥7.46b and CN¥7.80b worth of receivables due within a year. So it has liabilities totalling CN¥960.9m more than its cash and near-term receivables, combined.
Given SINOMACH HEAVY EQUIPMENT GROUPLTD has a market capitalization of CN¥20.2b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, SINOMACH HEAVY EQUIPMENT GROUPLTD boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, SINOMACH HEAVY EQUIPMENT GROUPLTD grew its EBIT by 784% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since SINOMACH HEAVY EQUIPMENT GROUPLTD 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 SINOMACH HEAVY EQUIPMENT GROUPLTD 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. Happily for any shareholders, SINOMACH HEAVY EQUIPMENT GROUPLTD actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
We could understand if investors are concerned about SINOMACH HEAVY EQUIPMENT GROUPLTD's liabilities, but we can be reassured by the fact it has has net cash of CN¥4.49b. The cherry on top was that in converted 208% of that EBIT to free cash flow, bringing in CN¥499m. So is SINOMACH HEAVY EQUIPMENT GROUPLTD'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. For example, we've discovered 1 warning sign for SINOMACH HEAVY EQUIPMENT GROUPLTD that you should be aware of before investing here.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.