Sany Heavy IndustryLtd (SHSE:600031) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Sany Heavy Industry Co.,Ltd (SHSE:600031) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Sany Heavy IndustryLtd

What Is Sany Heavy IndustryLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Sany Heavy IndustryLtd had CN¥27.1b of debt in September 2024, down from CN¥32.2b, one year before. But it also has CN¥27.6b in cash to offset that, meaning it has CN¥446.6m net cash.

A Look At Sany Heavy IndustryLtd's Liabilities

The latest balance sheet data shows that Sany Heavy IndustryLtd had liabilities of CN¥58.2b due within a year, and liabilities of CN¥19.5b falling due after that. Offsetting this, it had CN¥27.6b in cash and CN¥30.2b in receivables that were due within 12 months. So its liabilities total CN¥20.0b more than the combination of its cash and short-term receivables.

Given Sany Heavy IndustryLtd has a humongous market capitalization of CN¥145.9b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Sany Heavy IndustryLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the other side of the story is that Sany Heavy IndustryLtd saw its EBIT decline by 2.4% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Sany Heavy IndustryLtd's ability to maintain a healthy balance sheet going forward. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 cold hard cash means it can reduce its debt when it wants to.

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 are not troubled with Sany Heavy IndustryLtd's debt use. 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 - Sany Heavy IndustryLtd has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.