Is Jiangsu Yawei Machine Tool (SZSE:002559) A Risky Investment?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Jiangsu Yawei Machine Tool Co., Ltd. (SZSE:002559) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Jiangsu Yawei Machine Tool

How Much Debt Does Jiangsu Yawei Machine Tool Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Jiangsu Yawei Machine Tool had CN¥965.3m of debt, an increase on CN¥749.5m, over one year. However, it does have CN¥1.15b in cash offsetting this, leading to net cash of CN¥183.8m.

A Look At Jiangsu Yawei Machine Tool's Liabilities

We can see from the most recent balance sheet that Jiangsu Yawei Machine Tool had liabilities of CN¥2.29b falling due within a year, and liabilities of CN¥526.4m due beyond that. On the other hand, it had cash of CN¥1.15b and CN¥688.0m worth of receivables due within a year. So it has liabilities totalling CN¥979.6m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Jiangsu Yawei Machine Tool has a market capitalization of CN¥4.26b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Jiangsu Yawei Machine Tool also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Jiangsu Yawei Machine Tool grew its EBIT by 14% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jiangsu Yawei Machine Tool 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. Jiangsu Yawei Machine Tool 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. In the last three years, Jiangsu Yawei Machine Tool basically broke even on a free cash flow basis. While many companies do operate at break-even, we prefer see substantial free cash flow, especially if a it already has dead.

Summing Up

While Jiangsu Yawei Machine Tool does have more liabilities than liquid assets, it also has net cash of CN¥183.8m. On top of that, it increased its EBIT by 14% in the last twelve months. So we don't have any problem with Jiangsu Yawei Machine Tool's use of debt. 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. For example Jiangsu Yawei Machine Tool has 2 warning signs (and 1 which is significant) we think you should know about.

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.