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 note that Shenyang Machine Tool Co., Ltd. (SZSE:000410) does have debt on its balance sheet. 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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Shenyang Machine Tool's Net Debt?

As you can see below, at the end of June 2024, Shenyang Machine Tool had CN¥684.1m of debt, up from CN¥1.00m a year ago. Click the image for more detail. However, it also had CN¥199.3m in cash, and so its net debt is CN¥484.8m.

How Strong Is Shenyang Machine Tool's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenyang Machine Tool had liabilities of CN¥1.61b due within 12 months and liabilities of CN¥495.6m due beyond that. On the other hand, it had cash of CN¥199.3m and CN¥759.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.15b.

Since publicly traded Shenyang Machine Tool shares are worth a total of CN¥12.8b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shenyang Machine Tool'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.

Over 12 months, Shenyang Machine Tool made a loss at the EBIT level, and saw its revenue drop to CN¥1.5b, which is a fall of 2.9%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Shenyang Machine Tool produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥210m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥156m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Shenyang Machine Tool (1 doesn't sit too well with us) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.