Xiangtan Yongda Machinery Manufacturing (SZSE:001239) Takes On Some Risk With Its Use Of 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. We can see that Xiangtan Yongda Machinery Manufacturing Co., Ltd. (SZSE:001239) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Xiangtan Yongda Machinery Manufacturing

What Is Xiangtan Yongda Machinery Manufacturing's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Xiangtan Yongda Machinery Manufacturing had CN¥534.7m of debt in June 2024, down from CN¥603.9m, one year before. But it also has CN¥586.1m in cash to offset that, meaning it has CN¥51.4m net cash.

How Strong Is Xiangtan Yongda Machinery Manufacturing's Balance Sheet?

We can see from the most recent balance sheet that Xiangtan Yongda Machinery Manufacturing had liabilities of CN¥475.4m falling due within a year, and liabilities of CN¥352.5m due beyond that. On the other hand, it had cash of CN¥586.1m and CN¥669.2m worth of receivables due within a year. So it actually has CN¥427.4m more liquid assets than total liabilities.

This surplus suggests that Xiangtan Yongda Machinery Manufacturing has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Xiangtan Yongda Machinery Manufacturing boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Xiangtan Yongda Machinery Manufacturing if management cannot prevent a repeat of the 28% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Xiangtan Yongda Machinery Manufacturing will need earnings to service that debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Xiangtan Yongda Machinery Manufacturing may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Xiangtan Yongda Machinery Manufacturing saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Xiangtan Yongda Machinery Manufacturing has CN¥51.4m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Xiangtan Yongda Machinery Manufacturing's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Xiangtan Yongda Machinery Manufacturing .

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.