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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Qinchuan Machine Tool & Tool Group Share Co., Ltd. (SZSE:000837) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Qinchuan Machine Tool & Tool Group Share's Debt?

You can click the graphic below for the historical numbers, but it shows that Qinchuan Machine Tool & Tool Group Share had CN¥1.03b of debt in March 2024, down from CN¥1.30b, one year before. But it also has CN¥1.85b in cash to offset that, meaning it has CN¥819.7m net cash.

How Healthy Is Qinchuan Machine Tool & Tool Group Share's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Qinchuan Machine Tool & Tool Group Share had liabilities of CN¥3.28b due within 12 months and liabilities of CN¥1.06b due beyond that. Offsetting these obligations, it had cash of CN¥1.85b as well as receivables valued at CN¥1.69b due within 12 months. So it has liabilities totalling CN¥791.5m more than its cash and near-term receivables, combined.

Of course, Qinchuan Machine Tool & Tool Group Share has a market capitalization of CN¥7.76b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Qinchuan Machine Tool & Tool Group Share boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Qinchuan Machine Tool & Tool Group Share 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.

In the last year Qinchuan Machine Tool & Tool Group Share had a loss before interest and tax, and actually shrunk its revenue by 6.4%, to CN¥3.7b. That's not what we would hope to see.

So How Risky Is Qinchuan Machine Tool & Tool Group Share?

While Qinchuan Machine Tool & Tool Group Share lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥20m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Qinchuan Machine Tool & Tool Group Share .

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.

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