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

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.' 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. 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?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Shenyang Machine Tool

How Much Debt Does Shenyang Machine Tool Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Shenyang Machine Tool had debt of CN¥1.10b, up from none in one year. However, it does have CN¥280.7m in cash offsetting this, leading to net debt of about CN¥817.1m.

A Look At Shenyang Machine Tool's Liabilities

According to the last reported balance sheet, Shenyang Machine Tool had liabilities of CN¥1.55b due within 12 months, and liabilities of CN¥613.7m due beyond 12 months. Offsetting these obligations, it had cash of CN¥280.7m as well as receivables valued at CN¥722.7m due within 12 months. So its liabilities total CN¥1.16b more than the combination of its cash and short-term receivables.

Since publicly traded Shenyang Machine Tool shares are worth a total of CN¥13.8b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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 5.8%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Shenyang Machine Tool produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥225m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Surprisingly, we note that it actually reported positive free cash flow of CN¥44m and a profit of CN¥29m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. To that end, you should learn about the 2 warning signs we've spotted with Shenyang Machine Tool (including 1 which makes us a bit uncomfortable) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

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