Shandong Golden Empire Precision Machinery Technology (SHSE:603270) Takes On Some Risk With Its Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Shandong Golden Empire Precision Machinery Technology Co., Ltd. (SHSE:603270) makes use of debt. 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. 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, 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.

View our latest analysis for Shandong Golden Empire Precision Machinery Technology

How Much Debt Does Shandong Golden Empire Precision Machinery Technology Carry?

The chart below, which you can click on for greater detail, shows that Shandong Golden Empire Precision Machinery Technology had CN¥228.2m in debt in September 2024; about the same as the year before. But on the other hand it also has CN¥661.9m in cash, leading to a CN¥433.7m net cash position.

A Look At Shandong Golden Empire Precision Machinery Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Shandong Golden Empire Precision Machinery Technology had liabilities of CN¥678.2m due within 12 months and liabilities of CN¥292.8m due beyond that. Offsetting this, it had CN¥661.9m in cash and CN¥610.9m in receivables that were due within 12 months. So it actually has CN¥301.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Shandong Golden Empire Precision Machinery Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shandong Golden Empire Precision Machinery Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Shandong Golden Empire Precision Machinery Technology's saving grace is its low debt levels, because its EBIT has tanked 70% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shandong Golden Empire Precision Machinery Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Shandong Golden Empire Precision Machinery Technology 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. Over the last three years, Shandong Golden Empire Precision Machinery Technology saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shandong Golden Empire Precision Machinery Technology has net cash of CN¥433.7m, as well as more liquid assets than liabilities. So while Shandong Golden Empire Precision Machinery Technology does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Shandong Golden Empire Precision Machinery Technology (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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.