Riyue Heavy IndustryLtd (SHSE:603218) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Riyue Heavy Industry Co.,Ltd (SHSE:603218) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Riyue Heavy IndustryLtd

How Much Debt Does Riyue Heavy IndustryLtd Carry?

The image below, which you can click on for greater detail, shows that Riyue Heavy IndustryLtd had debt of CN¥27.5m at the end of September 2024, a reduction from CN¥406.8m over a year. But it also has CN¥3.27b in cash to offset that, meaning it has CN¥3.24b net cash.

A Look At Riyue Heavy IndustryLtd's Liabilities

The latest balance sheet data shows that Riyue Heavy IndustryLtd had liabilities of CN¥2.04b due within a year, and liabilities of CN¥530.4m falling due after that. Offsetting these obligations, it had cash of CN¥3.27b as well as receivables valued at CN¥2.73b due within 12 months. So it can boast CN¥3.43b more liquid assets than total liabilities.

This surplus suggests that Riyue Heavy IndustryLtd is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Riyue Heavy IndustryLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Riyue Heavy IndustryLtd's load is not too heavy, because its EBIT was down 46% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Riyue Heavy IndustryLtd 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Riyue Heavy IndustryLtd 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. During the last three years, Riyue Heavy IndustryLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Riyue Heavy IndustryLtd has CN¥3.24b in net cash and a decent-looking balance sheet. So we are not troubled with Riyue Heavy IndustryLtd's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Riyue Heavy IndustryLtd (1 doesn't sit too well with us) 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.