SINOMACH HEAVY EQUIPMENT GROUPLTD (SHSE:601399) Could Easily Take On More Debt

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, SINOMACH HEAVY EQUIPMENT GROUP CO.,LTD (SHSE:601399) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for SINOMACH HEAVY EQUIPMENT GROUPLTD

How Much Debt Does SINOMACH HEAVY EQUIPMENT GROUPLTD Carry?

As you can see below, SINOMACH HEAVY EQUIPMENT GROUPLTD had CN¥495.3m of debt at December 2023, down from CN¥3.40b a year prior. But on the other hand it also has CN¥8.19b in cash, leading to a CN¥7.70b net cash position.

How Strong Is SINOMACH HEAVY EQUIPMENT GROUPLTD's Balance Sheet?

According to the last reported balance sheet, SINOMACH HEAVY EQUIPMENT GROUPLTD had liabilities of CN¥12.2b due within 12 months, and liabilities of CN¥3.36b due beyond 12 months. On the other hand, it had cash of CN¥8.19b and CN¥7.44b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to SINOMACH HEAVY EQUIPMENT GROUPLTD's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥20.4b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that SINOMACH HEAVY EQUIPMENT GROUPLTD has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, SINOMACH HEAVY EQUIPMENT GROUPLTD grew its EBIT by 2,498% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is SINOMACH HEAVY EQUIPMENT GROUPLTD'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While SINOMACH HEAVY EQUIPMENT GROUPLTD 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. Over the last three years, SINOMACH HEAVY EQUIPMENT GROUPLTD actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that SINOMACH HEAVY EQUIPMENT GROUPLTD has net cash of CN¥7.70b, as well as more liquid assets than liabilities. The cherry on top was that in converted 206% of that EBIT to free cash flow, bringing in CN¥26m. So is SINOMACH HEAVY EQUIPMENT GROUPLTD's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for SINOMACH HEAVY EQUIPMENT GROUPLTD 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.