David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Shandong Golden Empire Precision Machinery Technology Co., Ltd. (SHSE:603270) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Shandong Golden Empire Precision Machinery Technology Carry?
You can click the graphic below for the historical numbers, but it shows that Shandong Golden Empire Precision Machinery Technology had CN¥149.0m of debt in March 2024, down from CN¥356.3m, one year before. But on the other hand it also has CN¥911.1m in cash, leading to a CN¥762.0m net cash position.
A Look At Shandong Golden Empire Precision Machinery Technology's Liabilities
The latest balance sheet data shows that Shandong Golden Empire Precision Machinery Technology had liabilities of CN¥474.7m due within a year, and liabilities of CN¥254.5m falling due after that. Offsetting this, it had CN¥911.1m in cash and CN¥458.0m in receivables that were due within 12 months. So it actually has CN¥639.8m more liquid assets than total liabilities.
This short term liquidity is a sign that Shandong Golden Empire Precision Machinery Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shandong Golden Empire Precision Machinery Technology boasts net cash, so it's fair to say it does not have a heavy debt load!
But the bad news is that Shandong Golden Empire Precision Machinery Technology has seen its EBIT plunge 14% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shandong Golden Empire Precision Machinery Technology'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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shandong Golden Empire Precision Machinery Technology 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. During the last three years, Shandong Golden Empire Precision Machinery Technology burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Summing Up
While it is always sensible to investigate a company's debt, in this case Shandong Golden Empire Precision Machinery Technology has CN¥762.0m in net cash and a decent-looking balance sheet. So we are not troubled with Shandong Golden Empire Precision Machinery Technology's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Shandong Golden Empire Precision Machinery Technology you should know about.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.
