Is Sany Heavy Equipment International Holdings (HKG:631) 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. Importantly, Sany Heavy Equipment International Holdings Company Limited (HKG:631) does carry debt. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Sany Heavy Equipment International Holdings Carry?

The image below, which you can click on for greater detail, shows that at June 2025 Sany Heavy Equipment International Holdings had debt of CN¥11.0b, up from CN¥10.0b in one year. On the flip side, it has CN¥8.67b in cash leading to net debt of about CN¥2.28b.

How Healthy Is Sany Heavy Equipment International Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sany Heavy Equipment International Holdings had liabilities of CN¥23.1b due within 12 months and liabilities of CN¥8.02b due beyond that. Offsetting this, it had CN¥8.67b in cash and CN¥12.7b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥9.80b.

This deficit isn't so bad because Sany Heavy Equipment International Holdings is worth CN¥22.3b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

View our latest analysis for Sany Heavy Equipment International Holdings

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Sany Heavy Equipment International Holdings has a low net debt to EBITDA ratio of only 0.87. And its EBIT covers its interest expense a whopping 47.4 times over. So we're pretty relaxed about its super-conservative use of debt. Also positive, Sany Heavy Equipment International Holdings grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sany Heavy Equipment International Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Looking at the most recent three years, Sany Heavy Equipment International Holdings recorded free cash flow of 46% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

The good news is that Sany Heavy Equipment International Holdings's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But truth be told we feel its level of total liabilities does undermine this impression a bit. Taking all this data into account, it seems to us that Sany Heavy Equipment International Holdings takes a pretty sensible approach to debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Sany Heavy Equipment International Holdings's dividend history, without delay!

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.