Is Shaanxi Construction MachineryLtd (SHSE:600984) A Risky Investment?

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. As with many other companies Shaanxi Construction Machinery Co.,Ltd (SHSE:600984) makes use of debt. But is this debt a concern to shareholders?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Shaanxi Construction MachineryLtd

What Is Shaanxi Construction MachineryLtd's Net Debt?

As you can see below, Shaanxi Construction MachineryLtd had CN¥8.56b of debt at September 2024, down from CN¥9.24b a year prior. However, it also had CN¥1.45b in cash, and so its net debt is CN¥7.11b.

How Strong Is Shaanxi Construction MachineryLtd's Balance Sheet?

According to the last reported balance sheet, Shaanxi Construction MachineryLtd had liabilities of CN¥6.29b due within 12 months, and liabilities of CN¥6.89b due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.45b as well as receivables valued at CN¥5.26b due within 12 months. So its liabilities total CN¥6.47b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's CN¥5.24b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shaanxi Construction MachineryLtd'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.

Over 12 months, Shaanxi Construction MachineryLtd made a loss at the EBIT level, and saw its revenue drop to CN¥2.8b, which is a fall of 20%. That's not what we would hope to see.

Caveat Emptor

While Shaanxi Construction MachineryLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥485m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of CN¥555m over the last twelve months. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Shaanxi Construction MachineryLtd that 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.