Does Inner Mongolia First Machinery GroupLtd (SHSE:600967) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 can see that Inner Mongolia First Machinery Group Co.,Ltd. (SHSE:600967) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 Inner Mongolia First Machinery GroupLtd

What Is Inner Mongolia First Machinery GroupLtd's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Inner Mongolia First Machinery GroupLtd had debt of CN¥43.0m, up from CN¥25.0m in one year. However, it does have CN¥6.27b in cash offsetting this, leading to net cash of CN¥6.22b.

How Strong Is Inner Mongolia First Machinery GroupLtd's Balance Sheet?

According to the last reported balance sheet, Inner Mongolia First Machinery GroupLtd had liabilities of CN¥10.5b due within 12 months, and liabilities of CN¥768.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥6.27b as well as receivables valued at CN¥2.21b due within 12 months. So its liabilities total CN¥2.77b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Inner Mongolia First Machinery GroupLtd has a market capitalization of CN¥12.9b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Inner Mongolia First Machinery GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Inner Mongolia First Machinery GroupLtd grew its EBIT at 11% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Inner Mongolia First Machinery GroupLtd 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Inner Mongolia First Machinery GroupLtd 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. During the last three years, Inner Mongolia First Machinery GroupLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While Inner Mongolia First Machinery GroupLtd does have more liabilities than liquid assets, it also has net cash of CN¥6.22b. On top of that, it increased its EBIT by 11% in the last twelve months. So we don't have any problem with Inner Mongolia First Machinery GroupLtd'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. For instance, we've identified 2 warning signs for Inner Mongolia First Machinery GroupLtd (1 is significant) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

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