These 4 Measures Indicate That Sichuan Zigong Conveying Machine Group (SZSE:001288) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Sichuan Zigong Conveying Machine Group Co., Ltd. (SZSE:001288) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, 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 Sichuan Zigong Conveying Machine Group

What Is Sichuan Zigong Conveying Machine Group's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Sichuan Zigong Conveying Machine Group had debt of CN¥664.3m, up from CN¥546.7m in one year. But it also has CN¥1.45b in cash to offset that, meaning it has CN¥787.1m net cash.

How Healthy Is Sichuan Zigong Conveying Machine Group's Balance Sheet?

According to the last reported balance sheet, Sichuan Zigong Conveying Machine Group had liabilities of CN¥1.10b due within 12 months, and liabilities of CN¥746.2m due beyond 12 months. On the other hand, it had cash of CN¥1.45b and CN¥1.47b worth of receivables due within a year. So it actually has CN¥1.07b more liquid assets than total liabilities.

This surplus suggests that Sichuan Zigong Conveying Machine Group is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Sichuan Zigong Conveying Machine Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Sichuan Zigong Conveying Machine Group has boosted its EBIT by 50%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sichuan Zigong Conveying Machine Group 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Sichuan Zigong Conveying Machine Group 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. During the last three years, Sichuan Zigong Conveying Machine Group burned a lot of cash. 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 Sichuan Zigong Conveying Machine Group has CN¥787.1m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 50% over the last year. So we don't have any problem with Sichuan Zigong Conveying Machine Group's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Sichuan Zigong Conveying Machine Group (including 1 which shouldn't be ignored) .

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.