Is Gemac Engineering Machinery (SZSE:301048) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Gemac Engineering Machinery Co., Ltd. (SZSE:301048) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Gemac Engineering Machinery

What Is Gemac Engineering Machinery's Debt?

You can click the graphic below for the historical numbers, but it shows that Gemac Engineering Machinery had CN¥100.0m of debt in June 2024, down from CN¥250.1m, one year before. But it also has CN¥833.4m in cash to offset that, meaning it has CN¥733.3m net cash.

How Healthy Is Gemac Engineering Machinery's Balance Sheet?

The latest balance sheet data shows that Gemac Engineering Machinery had liabilities of CN¥2.16b due within a year, and liabilities of CN¥154.5m falling due after that. Offsetting these obligations, it had cash of CN¥833.4m as well as receivables valued at CN¥1.73b due within 12 months. So it can boast CN¥246.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Gemac Engineering Machinery could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Gemac Engineering Machinery has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Gemac Engineering Machinery's load is not too heavy, because its EBIT was down 24% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is Gemac Engineering 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Gemac Engineering 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. In the last three years, Gemac Engineering Machinery's free cash flow amounted to 21% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Gemac Engineering Machinery has CN¥733.3m in net cash and a decent-looking balance sheet. So we are not troubled with Gemac Engineering Machinery's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Gemac Engineering Machinery, you may well want to click here to check an interactive graph of its earnings per share history.

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.