The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Yingkou Jinchen Machinery Co., Ltd. (SHSE:603396) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Yingkou Jinchen Machinery
What Is Yingkou Jinchen Machinery's Debt?
The image below, which you can click on for greater detail, shows that at March 2024 Yingkou Jinchen Machinery had debt of CN¥661.6m, up from CN¥410.0m in one year. However, its balance sheet shows it holds CN¥1.24b in cash, so it actually has CN¥582.5m net cash.
A Look At Yingkou Jinchen Machinery's Liabilities
Zooming in on the latest balance sheet data, we can see that Yingkou Jinchen Machinery had liabilities of CN¥3.60b due within 12 months and liabilities of CN¥157.6m due beyond that. Offsetting these obligations, it had cash of CN¥1.24b as well as receivables valued at CN¥1.39b due within 12 months. So its liabilities total CN¥1.12b more than the combination of its cash and short-term receivables.
Yingkou Jinchen Machinery has a market capitalization of CN¥4.07b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Yingkou Jinchen Machinery also has more cash than debt, so we're pretty confident it can manage its debt safely.
In addition to that, we're happy to report that Yingkou Jinchen Machinery has boosted its EBIT by 62%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is Yingkou Jinchen Machinery's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Yingkou Jinchen Machinery may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Yingkou Jinchen Machinery burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing Up
While Yingkou Jinchen Machinery does have more liabilities than liquid assets, it also has net cash of CN¥582.5m. And we liked the look of last year's 62% year-on-year EBIT growth. So we are not troubled with Yingkou Jinchen Machinery's debt use. 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. To that end, you should be aware of the 1 warning sign we've spotted with Yingkou Jinchen Machinery .
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.
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About SHSE:603396
Yingkou Jinchen Machinery
Focuses on vacuum coating technology, automation technology, and equipment intelligent solutions worldwide.
Adequate balance sheet and slightly overvalued.