Does Sany Heavy IndustryLtd (SHSE:600031) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Sany Heavy Industry Co.,Ltd (SHSE:600031) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Sany Heavy IndustryLtd

How Much Debt Does Sany Heavy IndustryLtd Carry?

The image below, which you can click on for greater detail, shows that Sany Heavy IndustryLtd had debt of CN¥27.1b at the end of September 2024, a reduction from CN¥32.2b over a year. However, it does have CN¥27.6b in cash offsetting this, leading to net cash of CN¥446.6m.

How Strong Is Sany Heavy IndustryLtd's Balance Sheet?

According to the last reported balance sheet, Sany Heavy IndustryLtd had liabilities of CN¥58.2b due within 12 months, and liabilities of CN¥19.5b due beyond 12 months. Offsetting this, it had CN¥27.6b in cash and CN¥30.2b in receivables that were due within 12 months. So it has liabilities totalling CN¥20.0b more than its cash and near-term receivables, combined.

Since publicly traded Sany Heavy IndustryLtd shares are worth a very impressive total of CN¥158.0b, it seems unlikely that this level of liabilities would be a major 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, Sany Heavy IndustryLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Sany Heavy IndustryLtd saw its EBIT drop by 2.4% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Sany Heavy IndustryLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Sany Heavy IndustryLtd 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 most recent three years, Sany Heavy IndustryLtd recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although Sany Heavy IndustryLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥446.6m. So we don't have any problem with Sany Heavy IndustryLtd's use of debt. 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 1 warning sign for Sany Heavy IndustryLtd 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.