Would Shenyang Machine Tool (SZSE:000410) Be Better Off With Less Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Shenyang Machine Tool Co., Ltd. (SZSE:000410) does use debt in its business. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Shenyang Machine Tool

How Much Debt Does Shenyang Machine Tool Carry?

As you can see below, at the end of September 2024, Shenyang Machine Tool had CN¥1.23b of debt, up from CN¥150.1m a year ago. Click the image for more detail. However, it does have CN¥251.6m in cash offsetting this, leading to net debt of about CN¥978.6m.

How Strong Is Shenyang Machine Tool's Balance Sheet?

The latest balance sheet data shows that Shenyang Machine Tool had liabilities of CN¥1.90b due within a year, and liabilities of CN¥432.2m falling due after that. Offsetting these obligations, it had cash of CN¥251.6m as well as receivables valued at CN¥729.8m due within 12 months. So it has liabilities totalling CN¥1.35b more than its cash and near-term receivables, combined.

Given Shenyang Machine Tool has a market capitalization of CN¥15.1b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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¥1.4b, which is a fall of 7.1%. That's not what we would hope to see.

Caveat Emptor

Importantly, Shenyang Machine Tool had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥224m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥157m of cash over the last year. So to be blunt we think it is risky. For riskier companies like Shenyang Machine Tool I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.