We Think Zhengzhou Coal Mining Machinery Group (SHSE:601717) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Zhengzhou Coal Mining Machinery Group Company Limited (SHSE:601717) does carry debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Zhengzhou Coal Mining Machinery Group

How Much Debt Does Zhengzhou Coal Mining Machinery Group Carry?

You can click the graphic below for the historical numbers, but it shows that Zhengzhou Coal Mining Machinery Group had CN¥7.65b of debt in June 2024, down from CN¥8.74b, one year before. However, it does have CN¥12.6b in cash offsetting this, leading to net cash of CN¥4.93b.

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¥20.0b due within 12 months and liabilities of CN¥6.87b due beyond that. Offsetting this, it had CN¥12.6b in cash and CN¥13.8b in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Of course, Zhengzhou Coal Mining Machinery Group has a market capitalization of CN¥20.8b, 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. 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!

In addition to that, we're happy to report that Zhengzhou Coal Mining Machinery Group has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. 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'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 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. During the last three years, Zhengzhou Coal Mining Machinery Group produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. 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¥4.93b. 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Zhengzhou Coal Mining Machinery Group 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.