Is Wuxi Huadong Heavy Machinery (SZSE:002685) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Wuxi Huadong Heavy Machinery Co., Ltd. (SZSE:002685) makes use of debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Wuxi Huadong Heavy Machinery

How Much Debt Does Wuxi Huadong Heavy Machinery Carry?

You can click the graphic below for the historical numbers, but it shows that Wuxi Huadong Heavy Machinery had CN¥117.7m of debt in September 2024, down from CN¥189.9m, one year before. But it also has CN¥555.4m in cash to offset that, meaning it has CN¥437.7m net cash.

A Look At Wuxi Huadong Heavy Machinery's Liabilities

The latest balance sheet data shows that Wuxi Huadong Heavy Machinery had liabilities of CN¥2.04b due within a year, and liabilities of CN¥103.6m falling due after that. Offsetting this, it had CN¥555.4m in cash and CN¥140.3m in receivables that were due within 12 months. So its liabilities total CN¥1.45b 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¥6.41b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Wuxi Huadong Heavy Machinery boasts net cash, so it's fair to say it does not have a heavy debt load! 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.

In the last year Wuxi Huadong Heavy Machinery had a loss before interest and tax, and actually shrunk its revenue by 13%, to CN¥1.1b. That's not what we would hope to see.

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¥76m. 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Wuxi Huadong Heavy Machinery that you should be aware of before investing here.

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.