Is Hangzhou Zhongya Machinery (SZSE:300512) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Hangzhou Zhongya Machinery Co., Ltd. (SZSE:300512) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 Hangzhou Zhongya Machinery

What Is Hangzhou Zhongya Machinery's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Hangzhou Zhongya Machinery had debt of CN¥297.4m, up from CN¥248.1m in one year. But on the other hand it also has CN¥321.1m in cash, leading to a CN¥23.7m net cash position.

A Look At Hangzhou Zhongya Machinery's Liabilities

According to the last reported balance sheet, Hangzhou Zhongya Machinery had liabilities of CN¥932.3m due within 12 months, and liabilities of CN¥68.9m due beyond 12 months. On the other hand, it had cash of CN¥321.1m and CN¥548.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥131.9m.

Since publicly traded Hangzhou Zhongya Machinery shares are worth a total of CN¥3.71b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Hangzhou Zhongya Machinery boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hangzhou Zhongya 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 Hangzhou Zhongya Machinery wasn't profitable at an EBIT level, but managed to grow its revenue by 9.2%, to CN¥1.1b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Hangzhou Zhongya Machinery?

While Hangzhou Zhongya Machinery lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥18m. So taking that on face value, and considering the cash, we don't think its very 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 5 warning signs for Hangzhou Zhongya Machinery (of which 2 are concerning!) 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.