Does Cosmos Machinery Enterprises (HKG:118) Have A Healthy Balance Sheet?

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. Importantly, Cosmos Machinery Enterprises Limited (HKG:118) does carry debt. But is this debt a concern to shareholders?

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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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Cosmos Machinery Enterprises Carry?

The image below, which you can click on for greater detail, shows that Cosmos Machinery Enterprises had debt of HK$141.6m at the end of June 2025, a reduction from HK$238.1m over a year. However, it does have HK$470.5m in cash offsetting this, leading to net cash of HK$328.9m.

How Healthy Is Cosmos Machinery Enterprises' Balance Sheet?

We can see from the most recent balance sheet that Cosmos Machinery Enterprises had liabilities of HK$947.0m falling due within a year, and liabilities of HK$35.1m due beyond that. Offsetting this, it had HK$470.5m in cash and HK$736.2m in receivables that were due within 12 months. So it can boast HK$224.6m more liquid assets than total liabilities.

This excess liquidity is a great indication that Cosmos Machinery Enterprises' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Cosmos Machinery Enterprises has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Cosmos Machinery Enterprises

But the bad news is that Cosmos Machinery Enterprises has seen its EBIT plunge 15% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Cosmos Machinery Enterprises will need earnings to service that debt. 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. Cosmos Machinery Enterprises 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. Over the last three years, Cosmos Machinery Enterprises actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Cosmos Machinery Enterprises has HK$328.9m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 145% of that EBIT to free cash flow, bringing in -HK$110m. So we don't think Cosmos Machinery Enterprises'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 instance, we've identified 2 warning signs for Cosmos Machinery Enterprises that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.