SINOPEC Engineering (Group) (HKG:2386) Seems To Use Debt Rather Sparingly

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.' 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 SINOPEC Engineering (Group) Co., Ltd. (HKG:2386) makes use of debt. But the more important question is: how much risk is that debt creating?

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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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does SINOPEC Engineering (Group) Carry?

The image below, which you can click on for greater detail, shows that at June 2025 SINOPEC Engineering (Group) had debt of CN¥158.5m, up from CN¥129.2m in one year. But on the other hand it also has CN¥25.2b in cash, leading to a CN¥25.0b net cash position.

A Look At SINOPEC Engineering (Group)'s Liabilities

According to the last reported balance sheet, SINOPEC Engineering (Group) had liabilities of CN¥54.4b due within 12 months, and liabilities of CN¥1.96b due beyond 12 months. Offsetting these obligations, it had cash of CN¥25.2b as well as receivables valued at CN¥42.2b due within 12 months. So it actually has CN¥11.0b more liquid assets than total liabilities.

This luscious liquidity implies that SINOPEC Engineering (Group)'s balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, SINOPEC Engineering (Group) boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for SINOPEC Engineering (Group)

But the other side of the story is that SINOPEC Engineering (Group) saw its EBIT decline by 3.0% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if SINOPEC Engineering (Group) can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. SINOPEC Engineering (Group) 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, SINOPEC Engineering (Group) actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that SINOPEC Engineering (Group) has net cash of CN¥25.0b, as well as more liquid assets than liabilities. The cherry on top was that in converted 228% of that EBIT to free cash flow, bringing in CN¥4.9b. So we don't think SINOPEC Engineering (Group)'s use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - SINOPEC Engineering (Group) has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.