Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Xiamen XGMA Machinery Company Limited (SHSE:600815) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Xiamen XGMA Machinery's Debt?

As you can see below, Xiamen XGMA Machinery had CN¥79.2m of debt at June 2024, down from CN¥125.8m a year prior. However, its balance sheet shows it holds CN¥1.03b in cash, so it actually has CN¥949.8m net cash.

How Strong Is Xiamen XGMA Machinery's Balance Sheet?

We can see from the most recent balance sheet that Xiamen XGMA Machinery had liabilities of CN¥454.3m falling due within a year, and liabilities of CN¥163.2m due beyond that. Offsetting these obligations, it had cash of CN¥1.03b as well as receivables valued at CN¥401.4m due within 12 months. So it can boast CN¥812.8m more liquid assets than total liabilities.

It's good to see that Xiamen XGMA Machinery has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Xiamen XGMA Machinery has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Xiamen XGMA Machinery's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Xiamen XGMA Machinery wasn't profitable at an EBIT level, but managed to grow its revenue by 7.3%, to CN¥870m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Xiamen XGMA Machinery?

Although Xiamen XGMA Machinery had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥98m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Xiamen XGMA Machinery's profit, revenue, and operating cashflow have changed over the last few years.

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.