Is Shenyang Machine Tool (SZSE:000410) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Shenyang Machine Tool Co., Ltd. (SZSE:000410) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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, 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.

See our latest analysis for Shenyang Machine Tool

What Is Shenyang Machine Tool's Debt?

As you can see below, Shenyang Machine Tool had CN¥150.1m of debt at September 2023, down from CN¥887.2m a year prior. However, its balance sheet shows it holds CN¥418.7m in cash, so it actually has CN¥268.5m net cash.

How Strong Is Shenyang Machine Tool's Balance Sheet?

According to the last reported balance sheet, Shenyang Machine Tool had liabilities of CN¥1.87b due within 12 months, and liabilities of CN¥808.3m due beyond 12 months. Offsetting this, it had CN¥418.7m in cash and CN¥826.7m in receivables that were due within 12 months. So its liabilities total CN¥1.43b more than the combination of its cash and short-term receivables.

Given Shenyang Machine Tool has a market capitalization of CN¥14.4b, it's hard to believe these liabilities pose much threat. 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, Shenyang Machine Tool also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shenyang Machine Tool's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Shenyang Machine Tool made a loss at the EBIT level, and saw its revenue drop to CN¥1.5b, which is a fall of 8.4%. We would much prefer see growth.

So How Risky Is Shenyang Machine Tool?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Shenyang Machine Tool lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥336m and booked a CN¥49m accounting loss. However, it has net cash of CN¥268.5m, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 Shenyang Machine Tool 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.