We Think Nanxing Machinery (SZSE:002757) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Nanxing Machinery Co., Ltd. (SZSE:002757) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Nanxing Machinery

How Much Debt Does Nanxing Machinery Carry?

The chart below, which you can click on for greater detail, shows that Nanxing Machinery had CN¥619.5m in debt in June 2024; about the same as the year before. However, it does have CN¥878.3m in cash offsetting this, leading to net cash of CN¥258.8m.

How Healthy Is Nanxing Machinery's Balance Sheet?

We can see from the most recent balance sheet that Nanxing Machinery had liabilities of CN¥942.5m falling due within a year, and liabilities of CN¥679.1m due beyond that. Offsetting this, it had CN¥878.3m in cash and CN¥534.6m in receivables that were due within 12 months. So it has liabilities totalling CN¥208.6m more than its cash and near-term receivables, combined.

Since publicly traded Nanxing Machinery shares are worth a total of CN¥3.83b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Nanxing Machinery boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Nanxing Machinery has increased its EBIT by 2.9% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Nanxing Machinery will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Nanxing Machinery 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, Nanxing Machinery produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Nanxing Machinery's liabilities, but we can be reassured by the fact it has has net cash of CN¥258.8m. So we don't think Nanxing Machinery's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Nanxing Machinery has 3 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.