Sany Heavy Equipment International Holdings (HKG:631) Has A Rock Solid Balance Sheet

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Sany Heavy Equipment International Holdings Company Limited (HKG:631) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. 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.

See our latest analysis for Sany Heavy Equipment International Holdings

What Is Sany Heavy Equipment International Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Sany Heavy Equipment International Holdings had CN¥3.28b of debt in June 2021, down from CN¥4.18b, one year before. But on the other hand it also has CN¥5.08b in cash, leading to a CN¥1.80b net cash position.

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

We can see from the most recent balance sheet that Sany Heavy Equipment International Holdings had liabilities of CN¥7.88b falling due within a year, and liabilities of CN¥2.98b due beyond that. Offsetting these obligations, it had cash of CN¥5.08b as well as receivables valued at CN¥4.57b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.21b.

Of course, Sany Heavy Equipment International Holdings has a market capitalization of CN¥25.7b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Sany Heavy Equipment International Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Sany Heavy Equipment International Holdings grew its EBIT at 16% over the last year, further increasing its ability to manage debt. 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'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. While Sany Heavy Equipment International Holdings 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. Over the last three years, Sany Heavy Equipment International Holdings recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

We could understand if investors are concerned about Sany Heavy Equipment International Holdings's liabilities, but we can be reassured by the fact it has has net cash of CN¥1.80b. And it impressed us with free cash flow of CN¥681m, being 83% of its EBIT. So is Sany Heavy Equipment International Holdings's debt a risk? It doesn't seem so to us. 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 - Sany Heavy Equipment International Holdings has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

If you’re looking to trade a wide range of investments, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.