Is Zhengzhou Coal Mining Machinery Group (SHSE:601717) Using Too Much 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.' 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 Zhengzhou Coal Mining Machinery Group Company Limited (SHSE:601717) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Zhengzhou Coal Mining Machinery Group

What Is Zhengzhou Coal Mining Machinery Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Zhengzhou Coal Mining Machinery Group had CN¥6.28b of debt in September 2024, down from CN¥8.66b, one year before. However, it does have CN¥11.4b in cash offsetting this, leading to net cash of CN¥5.15b.

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

According to the last reported balance sheet, Zhengzhou Coal Mining Machinery Group had liabilities of CN¥19.5b due within 12 months, and liabilities of CN¥5.84b due beyond 12 months. On the other hand, it had cash of CN¥11.4b and CN¥13.0b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥941.6m.

Of course, Zhengzhou Coal Mining Machinery Group has a market capitalization of CN¥22.4b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Zhengzhou Coal Mining Machinery Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Zhengzhou Coal Mining Machinery Group has been able to increase its EBIT by 30% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Zhengzhou Coal Mining Machinery Group'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Zhengzhou Coal Mining Machinery Group 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 most recent three years, Zhengzhou Coal Mining Machinery Group recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

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¥5.15b. And it impressed us with its EBIT growth of 30% over the last year. So is Zhengzhou Coal Mining Machinery Group's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Zhengzhou Coal Mining Machinery Group has 1 warning sign we think 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.