We Think Sany Heavy Equipment International Holdings (HKG:631) Can Stay On Top Of Its Debt

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.' 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. Importantly, Sany Heavy Equipment International Holdings Company Limited (HKG:631) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out 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 as of June 2022 Sany Heavy Equipment International Holdings had CN¥4.02b of debt, an increase on CN¥3.28b, over one year. But on the other hand it also has CN¥5.11b in cash, leading to a CN¥1.09b net cash position.

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

The latest balance sheet data shows that Sany Heavy Equipment International Holdings had liabilities of CN¥11.7b due within a year, and liabilities of CN¥2.15b falling due after that. Offsetting this, it had CN¥5.11b in cash and CN¥7.02b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.73b.

Given Sany Heavy Equipment International Holdings has a market capitalization of CN¥23.1b, it's hard to believe these liabilities pose much threat. 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.

On top of that, Sany Heavy Equipment International Holdings grew its EBIT by 38% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Sany Heavy Equipment International Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Sany Heavy Equipment International Holdings 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. Looking at the most recent three years, Sany Heavy Equipment International Holdings recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Sany Heavy Equipment International Holdings has CN¥1.09b in net cash. And it impressed us with its EBIT growth of 38% over the last year. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Sany Heavy Equipment International Holdings you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.