Is Qinchuan Machine Tool & Tool Group Share (SZSE:000837) Using Too Much Debt?

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 Qinchuan Machine Tool & Tool Group Share Co., Ltd. (SZSE:000837) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. 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.

Check out our latest analysis for Qinchuan Machine Tool & Tool Group Share

What Is Qinchuan Machine Tool & Tool Group Share's Debt?

The image below, which you can click on for greater detail, shows that Qinchuan Machine Tool & Tool Group Share had debt of CN¥933.9m at the end of September 2024, a reduction from CN¥1.19b over a year. But it also has CN¥1.56b in cash to offset that, meaning it has CN¥621.9m net cash.

A Look At Qinchuan Machine Tool & Tool Group Share's Liabilities

The latest balance sheet data shows that Qinchuan Machine Tool & Tool Group Share had liabilities of CN¥2.97b due within a year, and liabilities of CN¥1.04b falling due after that. Offsetting these obligations, it had cash of CN¥1.56b as well as receivables valued at CN¥1.67b due within 12 months. So it has liabilities totalling CN¥789.5m more than its cash and near-term receivables, combined.

Given Qinchuan Machine Tool & Tool Group Share has a market capitalization of CN¥12.3b, 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. Despite its noteworthy liabilities, Qinchuan Machine Tool & Tool Group Share boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Qinchuan Machine Tool & Tool Group Share 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.

In the last year Qinchuan Machine Tool & Tool Group Share's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is Qinchuan Machine Tool & Tool Group Share?

Although Qinchuan Machine Tool & Tool Group Share had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥23m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Qinchuan Machine Tool & Tool Group Share that you should be aware of before investing here.

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.