Does Wuxi Huadong Heavy Machinery (SZSE:002685) Have A Healthy Balance Sheet?

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.' 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. Importantly, Wuxi Huadong Heavy Machinery Co., Ltd. (SZSE:002685) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Wuxi Huadong Heavy Machinery

What Is Wuxi Huadong Heavy Machinery's Debt?

The image below, which you can click on for greater detail, shows that Wuxi Huadong Heavy Machinery had debt of CN¥111.1m at the end of June 2024, a reduction from CN¥258.6m over a year. However, it does have CN¥605.0m in cash offsetting this, leading to net cash of CN¥493.9m.

How Strong Is Wuxi Huadong Heavy Machinery's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Wuxi Huadong Heavy Machinery had liabilities of CN¥2.09b due within 12 months and liabilities of CN¥163.3m due beyond that. On the other hand, it had cash of CN¥605.0m and CN¥213.4m worth of receivables due within a year. So its liabilities total CN¥1.44b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Wuxi Huadong Heavy Machinery has a market capitalization of CN¥4.21b, 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, Wuxi Huadong Heavy Machinery 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 Wuxi Huadong Heavy Machinery'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.

Over 12 months, Wuxi Huadong Heavy Machinery made a loss at the EBIT level, and saw its revenue drop to CN¥844m, which is a fall of 33%. That makes us nervous, to say the least.

So How Risky Is Wuxi Huadong Heavy Machinery?

Although Wuxi Huadong Heavy Machinery had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥68m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Wuxi Huadong Heavy Machinery you should know about.

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.