Jiangsu Yawei Machine Tool (SZSE:002559) Has A Somewhat Strained Balance Sheet

Warren Buffett famously said, '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 can see that Jiangsu Yawei Machine Tool Co., Ltd. (SZSE:002559) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Jiangsu Yawei Machine Tool

What Is Jiangsu Yawei Machine Tool's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Jiangsu Yawei Machine Tool had CN¥967.2m of debt, an increase on CN¥832.8m, over one year. However, it does have CN¥1.11b in cash offsetting this, leading to net cash of CN¥145.7m.

How Healthy Is Jiangsu Yawei Machine Tool's Balance Sheet?

We can see from the most recent balance sheet that Jiangsu Yawei Machine Tool had liabilities of CN¥2.34b falling due within a year, and liabilities of CN¥505.3m due beyond that. Offsetting this, it had CN¥1.11b in cash and CN¥648.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.08b.

This deficit isn't so bad because Jiangsu Yawei Machine Tool is worth CN¥4.55b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Jiangsu Yawei Machine Tool boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Jiangsu Yawei Machine Tool's load is not too heavy, because its EBIT was down 50% 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 it is future earnings, more than anything, that will determine Jiangsu Yawei Machine Tool's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Jiangsu Yawei Machine Tool has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Jiangsu Yawei Machine Tool burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While Jiangsu Yawei Machine Tool does have more liabilities than liquid assets, it also has net cash of CN¥145.7m. So although we see some areas for improvement, we're not too worried about Jiangsu Yawei Machine Tool's balance sheet. 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. We've identified 2 warning signs with Jiangsu Yawei Machine Tool , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.