These 4 Measures Indicate That SINOMACH HEAVY EQUIPMENT GROUPLTD (SHSE:601399) Is Using Debt Safely

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 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. We note that SINOMACH HEAVY EQUIPMENT GROUP CO.,LTD (SHSE:601399) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for SINOMACH HEAVY EQUIPMENT GROUPLTD

What Is SINOMACH HEAVY EQUIPMENT GROUPLTD's Net Debt?

As you can see below, SINOMACH HEAVY EQUIPMENT GROUPLTD had CN¥3.01b of debt at September 2024, down from CN¥3.50b a year prior. However, its balance sheet shows it holds CN¥7.71b in cash, so it actually has CN¥4.71b net cash.

A Look At SINOMACH HEAVY EQUIPMENT GROUPLTD's Liabilities

We can see from the most recent balance sheet that SINOMACH HEAVY EQUIPMENT GROUPLTD had liabilities of CN¥13.5b falling due within a year, and liabilities of CN¥3.36b due beyond that. Offsetting these obligations, it had cash of CN¥7.71b as well as receivables valued at CN¥7.95b due within 12 months. So it has liabilities totalling CN¥1.20b more than its cash and near-term receivables, combined.

Given SINOMACH HEAVY EQUIPMENT GROUPLTD has a market capitalization of CN¥21.1b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, SINOMACH HEAVY EQUIPMENT GROUPLTD also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that SINOMACH HEAVY EQUIPMENT GROUPLTD grew its EBIT by 461% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 SINOMACH HEAVY EQUIPMENT GROUPLTD's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about SINOMACH HEAVY EQUIPMENT GROUPLTD's liabilities, but we can be reassured by the fact it has has net cash of CN¥4.71b. And it impressed us with free cash flow of CN¥636m, being 194% of its EBIT. So is SINOMACH HEAVY EQUIPMENT GROUPLTD's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in SINOMACH HEAVY EQUIPMENT GROUPLTD, you may well want to click here to check an interactive graph of its earnings per share history.

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.