Is Sinoma International EngineeringLtd (SHSE:600970) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Sinoma International Engineering Co.,Ltd (SHSE:600970) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Sinoma International EngineeringLtd

What Is Sinoma International EngineeringLtd's Net Debt?

The chart below, which you can click on for greater detail, shows that Sinoma International EngineeringLtd had CN¥6.71b in debt in March 2024; about the same as the year before. But on the other hand it also has CN¥8.37b in cash, leading to a CN¥1.66b net cash position.

A Look At Sinoma International EngineeringLtd's Liabilities

According to the last reported balance sheet, Sinoma International EngineeringLtd had liabilities of CN¥31.5b due within 12 months, and liabilities of CN¥3.94b due beyond 12 months. Offsetting this, it had CN¥8.37b in cash and CN¥20.8b in receivables that were due within 12 months. So it has liabilities totalling CN¥6.31b more than its cash and near-term receivables, combined.

Given Sinoma International EngineeringLtd has a market capitalization of CN¥34.2b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Sinoma International EngineeringLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Sinoma International EngineeringLtd has boosted its EBIT by 39%, thus reducing the spectre of future debt repayments. 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 Sinoma International EngineeringLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Sinoma International EngineeringLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Sinoma International EngineeringLtd's free cash flow amounted to 43% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While Sinoma International EngineeringLtd does have more liabilities than liquid assets, it also has net cash of CN¥1.66b. And we liked the look of last year's 39% year-on-year EBIT growth. So we don't think Sinoma International EngineeringLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Sinoma International EngineeringLtd that you should be aware of before investing here.

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.