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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Qinchuan Machine Tool & Tool Group Share Co., Ltd. (SZSE:000837) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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. 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 Qinchuan Machine Tool & Tool Group Share

How Much Debt Does Qinchuan Machine Tool & Tool Group Share Carry?

You can click the graphic below for the historical numbers, but it shows that Qinchuan Machine Tool & Tool Group Share had CN¥933.9m of debt in September 2024, down from CN¥1.19b, one year before. But on the other hand it also has CN¥1.56b in cash, leading to a CN¥621.9m net cash position.

How Healthy Is Qinchuan Machine Tool & Tool Group Share's Balance Sheet?

We can see from the most recent balance sheet that Qinchuan Machine Tool & Tool Group Share had liabilities of CN¥2.97b falling due within a year, and liabilities of CN¥1.04b due beyond that. On the other hand, it had cash of CN¥1.56b and CN¥1.67b worth of receivables due within a year. 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¥10.2b, 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. While it does have liabilities worth noting, Qinchuan Machine Tool & Tool Group Share also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Qinchuan Machine Tool & Tool Group Share's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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?

While Qinchuan Machine Tool & Tool Group Share lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Qinchuan Machine Tool & Tool Group Share that you should be aware of.

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.