Does Shantui Construction Machinery (SZSE:000680) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Shantui Construction Machinery Co., Ltd. (SZSE:000680) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shantui Construction Machinery

What Is Shantui Construction Machinery's Net Debt?

The image below, which you can click on for greater detail, shows that Shantui Construction Machinery had debt of CN¥579.0m at the end of September 2023, a reduction from CN¥867.6m over a year. However, its balance sheet shows it holds CN¥2.83b in cash, so it actually has CN¥2.25b net cash.

A Look At Shantui Construction Machinery's Liabilities

The latest balance sheet data shows that Shantui Construction Machinery had liabilities of CN¥6.74b due within a year, and liabilities of CN¥317.5m falling due after that. Offsetting these obligations, it had cash of CN¥2.83b as well as receivables valued at CN¥4.32b due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Shantui Construction Machinery's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥9.89b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Shantui Construction Machinery boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Shantui Construction Machinery grew its EBIT by 286% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shantui Construction Machinery's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shantui Construction Machinery has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Shantui Construction Machinery recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shantui Construction Machinery has net cash of CN¥2.25b, as well as more liquid assets than liabilities. And we liked the look of last year's 286% year-on-year EBIT growth. So is Shantui Construction Machinery's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Shantui Construction Machinery is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.