Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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, SINOMACH HEAVY EQUIPMENT GROUP CO.,LTD (SHSE:601399) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for SINOMACH HEAVY EQUIPMENT GROUPLTD
What Is SINOMACH HEAVY EQUIPMENT GROUPLTD's Net Debt?
The chart below, which you can click on for greater detail, shows that SINOMACH HEAVY EQUIPMENT GROUPLTD had CN¥3.50b in debt in September 2023; about the same as the year before. But it also has CN¥7.57b in cash to offset that, meaning it has CN¥4.07b net cash.
A Look At SINOMACH HEAVY EQUIPMENT GROUPLTD's Liabilities
The latest balance sheet data shows that SINOMACH HEAVY EQUIPMENT GROUPLTD had liabilities of CN¥11.5b due within a year, and liabilities of CN¥3.40b falling due after that. Offsetting these obligations, it had cash of CN¥7.57b as well as receivables valued at CN¥7.65b due within 12 months. So it actually has CN¥337.4m more liquid assets than total liabilities.
This state of affairs indicates that SINOMACH HEAVY EQUIPMENT GROUPLTD's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥21.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, SINOMACH HEAVY EQUIPMENT GROUPLTD boasts net cash, so it's fair to say it does not have a heavy debt load!
In fact SINOMACH HEAVY EQUIPMENT GROUPLTD's saving grace is its low debt levels, because its EBIT has tanked 73% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since SINOMACH HEAVY EQUIPMENT GROUPLTD 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While SINOMACH HEAVY EQUIPMENT GROUPLTD 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. Happily for any shareholders, SINOMACH HEAVY EQUIPMENT GROUPLTD actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that SINOMACH HEAVY EQUIPMENT GROUPLTD has net cash of CN¥4.07b, as well as more liquid assets than liabilities. The cherry on top was that in converted 131% of that EBIT to free cash flow, bringing in CN¥315m. So we are not troubled with SINOMACH HEAVY EQUIPMENT GROUPLTD's debt use. 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. Case in point: We've spotted 1 warning sign for SINOMACH HEAVY EQUIPMENT GROUPLTD 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.
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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.