Is Zhengzhou Coal Mining Machinery Group (SHSE:601717) A Risky Investment?

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.' 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. As with many other companies Zhengzhou Coal Mining Machinery Group Company Limited (SHSE:601717) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Zhengzhou Coal Mining Machinery Group

What Is Zhengzhou Coal Mining Machinery Group's Debt?

As you can see below, Zhengzhou Coal Mining Machinery Group had CN¥7.19b of debt at March 2024, down from CN¥8.25b a year prior. But on the other hand it also has CN¥12.8b in cash, leading to a CN¥5.64b net cash position.

How Strong Is Zhengzhou Coal Mining Machinery Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhengzhou Coal Mining Machinery Group had liabilities of CN¥18.1b due within 12 months and liabilities of CN¥8.24b due beyond that. Offsetting this, it had CN¥12.8b in cash and CN¥13.1b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Zhengzhou Coal Mining Machinery Group's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥27.4b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Zhengzhou Coal Mining Machinery Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Zhengzhou Coal Mining Machinery Group grew its EBIT by 33% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Zhengzhou Coal Mining Machinery Group 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. Zhengzhou Coal Mining Machinery Group 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. Looking at the most recent three years, Zhengzhou Coal Mining Machinery Group recorded free cash flow of 49% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Zhengzhou Coal Mining Machinery Group's liabilities, but we can be reassured by the fact it has has net cash of CN¥5.64b. And it impressed us with its EBIT growth of 33% over the last year. So we don't think Zhengzhou Coal Mining Machinery Group's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Zhengzhou Coal Mining Machinery Group that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.