Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Shandong Mining Machinery Group Co., Ltd. (SZSE:002526) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Shandong Mining Machinery Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Shandong Mining Machinery Group had CN¥493.2m of debt, an increase on CN¥310.4m, over one year. But on the other hand it also has CN¥838.4m in cash, leading to a CN¥345.2m net cash position.

How Healthy Is Shandong Mining Machinery Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shandong Mining Machinery Group had liabilities of CN¥1.90b due within 12 months and liabilities of CN¥4.78m due beyond that. Offsetting this, it had CN¥838.4m in cash and CN¥1.63b in receivables that were due within 12 months. So it actually has CN¥564.6m more liquid assets than total liabilities.

This surplus suggests that Shandong Mining Machinery Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shandong Mining Machinery Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Shandong Mining Machinery Group's EBIT dived 13%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Shandong Mining Machinery Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Shandong Mining Machinery Group 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. During the last three years, Shandong Mining Machinery Group burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shandong Mining Machinery Group has CN¥345.2m in net cash and a decent-looking balance sheet. So we don't have any problem with Shandong Mining Machinery Group's use of debt. 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 3 warning signs for Shandong Mining Machinery Group you should be aware of, and 2 of them are a bit unpleasant.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.