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

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 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?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Shenyang Machine Tool's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Shenyang Machine Tool had debt of CN¥1.23b, up from CN¥150.1m in one year. On the flip side, it has CN¥251.6m in cash leading to net debt of about CN¥978.6m.

How Healthy Is Shenyang Machine Tool's Balance Sheet?

According to the last reported balance sheet, Shenyang Machine Tool had liabilities of CN¥1.90b due within 12 months, and liabilities of CN¥432.2m due beyond 12 months. On the other hand, it had cash of CN¥251.6m and CN¥729.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.35b.

Given Shenyang Machine Tool has a market capitalization of CN¥16.4b, 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shenyang Machine Tool 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.

See our latest analysis for Shenyang Machine Tool

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

Over the last twelve months Shenyang Machine Tool produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥224m. 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. Another cause for caution is that is bled CN¥157m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Shenyang Machine Tool's profit, revenue, and operating cashflow have changed over the last few years.

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.