Xiamen XGMA Machinery (SHSE:600815) Has Debt But No Earnings; Should You Worry?

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.' 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. We note that Xiamen XGMA Machinery Company Limited (SHSE:600815) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Xiamen XGMA Machinery

How Much Debt Does Xiamen XGMA Machinery Carry?

The image below, which you can click on for greater detail, shows that Xiamen XGMA Machinery had debt of CN¥84.8m at the end of September 2024, a reduction from CN¥128.1m over a year. However, its balance sheet shows it holds CN¥493.6m in cash, so it actually has CN¥408.7m net cash.

How Healthy Is Xiamen XGMA Machinery's Balance Sheet?

We can see from the most recent balance sheet that Xiamen XGMA Machinery had liabilities of CN¥474.3m falling due within a year, and liabilities of CN¥157.0m due beyond that. Offsetting these obligations, it had cash of CN¥493.6m as well as receivables valued at CN¥380.1m due within 12 months. So it actually has CN¥242.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Xiamen XGMA Machinery could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Xiamen XGMA Machinery has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Xiamen XGMA Machinery's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Xiamen XGMA Machinery made a loss at the EBIT level, and saw its revenue drop to CN¥749m, which is a fall of 12%. We would much prefer see growth.

So How Risky Is Xiamen XGMA Machinery?

Although Xiamen XGMA Machinery had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥127m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Xiamen XGMA Machinery's profit, revenue, and operating cashflow have changed over the last few years.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.