These 4 Measures Indicate That Inner Mongolia First Machinery GroupLtd (SHSE:600967) Is Using Debt Extensively

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Inner Mongolia First Machinery Group Co.,Ltd. (SHSE:600967) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

View our latest analysis for Inner Mongolia First Machinery GroupLtd

How Much Debt Does Inner Mongolia First Machinery GroupLtd Carry?

As you can see below, at the end of September 2024, Inner Mongolia First Machinery GroupLtd had CN¥43.0m of debt, up from CN¥25.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥4.10b in cash, so it actually has CN¥4.05b net cash.

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

We can see from the most recent balance sheet that Inner Mongolia First Machinery GroupLtd had liabilities of CN¥7.59b falling due within a year, and liabilities of CN¥601.8m due beyond that. On the other hand, it had cash of CN¥4.10b and CN¥3.32b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥780.0m.

Since publicly traded Inner Mongolia First Machinery GroupLtd shares are worth a total of CN¥16.6b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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!

It is just as well that Inner Mongolia First Machinery GroupLtd's load is not too heavy, because its EBIT was down 26% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, Inner Mongolia First Machinery GroupLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

We could understand if investors are concerned about Inner Mongolia First Machinery GroupLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥4.05b. So while Inner Mongolia First Machinery GroupLtd does not have a great balance sheet, it's certainly not too bad. 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 2 warning signs for Inner Mongolia First Machinery GroupLtd (of which 1 is significant!) 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.