Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that SINOMACH HEAVY EQUIPMENT GROUP CO.,LTD (SHSE:601399) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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.

What Is SINOMACH HEAVY EQUIPMENT GROUPLTD's Net Debt?

As you can see below, SINOMACH HEAVY EQUIPMENT GROUPLTD had CN¥3.22b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥7.53b in cash, leading to a CN¥4.31b net cash position.

How Healthy Is SINOMACH HEAVY EQUIPMENT GROUPLTD's Balance Sheet?

The latest balance sheet data shows that SINOMACH HEAVY EQUIPMENT GROUPLTD had liabilities of CN¥12.7b due within a year, and liabilities of CN¥3.39b falling due after that. Offsetting these obligations, it had cash of CN¥7.53b as well as receivables valued at CN¥8.31b due within 12 months. So these liquid assets roughly match the 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¥18.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, SINOMACH HEAVY EQUIPMENT GROUPLTD boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, SINOMACH HEAVY EQUIPMENT GROUPLTD grew its EBIT by 333% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. SINOMACH HEAVY EQUIPMENT GROUPLTD 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. Happily for any shareholders, SINOMACH HEAVY EQUIPMENT GROUPLTD actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that SINOMACH HEAVY EQUIPMENT GROUPLTD has CN¥4.31b in net cash. The cherry on top was that in converted 213% of that EBIT to free cash flow, bringing in -CN¥215m. So is SINOMACH HEAVY EQUIPMENT GROUPLTD's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of SINOMACH HEAVY EQUIPMENT GROUPLTD's earnings per share history for free.

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.

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