Is Hefei Metalforming Intelligent Manufacturing (SHSE:603011) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Hefei Metalforming Intelligent Manufacturing Co., Ltd. (SHSE:603011) does use debt in its business. But is this debt a concern to shareholders?

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What Risk Does Debt Bring?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

What Is Hefei Metalforming Intelligent Manufacturing's Debt?

The image below, which you can click on for greater detail, shows that Hefei Metalforming Intelligent Manufacturing had debt of CN¥482.8m at the end of September 2024, a reduction from CN¥637.8m over a year. But it also has CN¥572.8m in cash to offset that, meaning it has CN¥90.0m net cash.

How Healthy Is Hefei Metalforming Intelligent Manufacturing's Balance Sheet?

The latest balance sheet data shows that Hefei Metalforming Intelligent Manufacturing had liabilities of CN¥2.01b due within a year, and liabilities of CN¥95.1m falling due after that. Offsetting these obligations, it had cash of CN¥572.8m as well as receivables valued at CN¥1.13b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥398.1m.

Of course, Hefei Metalforming Intelligent Manufacturing has a market capitalization of CN¥4.59b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Hefei Metalforming Intelligent Manufacturing boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Hefei Metalforming Intelligent Manufacturing's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Check out our latest analysis for Hefei Metalforming Intelligent Manufacturing

In the last year Hefei Metalforming Intelligent Manufacturing wasn't profitable at an EBIT level, but managed to grow its revenue by 15%, to CN¥2.0b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Hefei Metalforming Intelligent Manufacturing?

While Hefei Metalforming Intelligent Manufacturing lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥182m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. To that end, you should be aware of the 1 warning sign we've spotted with Hefei Metalforming Intelligent Manufacturing .

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.