Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Xiangtan Yongda Machinery Manufacturing Co., Ltd. (SZSE:001239) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Xiangtan Yongda Machinery Manufacturing's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Xiangtan Yongda Machinery Manufacturing had CN¥534.7m of debt in June 2024, down from CN¥603.9m, one year before. But on the other hand it also has CN¥586.1m in cash, leading to a CN¥51.4m net cash position.

A Look At Xiangtan Yongda Machinery Manufacturing's Liabilities

Zooming in on the latest balance sheet data, we can see that Xiangtan Yongda Machinery Manufacturing had liabilities of CN¥475.4m due within 12 months and liabilities of CN¥352.5m due beyond that. Offsetting this, it had CN¥586.1m in cash and CN¥669.2m in receivables that were due within 12 months. So it actually has CN¥427.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Xiangtan Yongda Machinery Manufacturing could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Xiangtan Yongda Machinery Manufacturing boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Xiangtan Yongda Machinery Manufacturing if management cannot prevent a repeat of the 28% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is Xiangtan Yongda Machinery Manufacturing's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Xiangtan Yongda Machinery Manufacturing 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, Xiangtan Yongda Machinery Manufacturing 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 we empathize with investors who find debt concerning, you should keep in mind that Xiangtan Yongda Machinery Manufacturing has net cash of CN¥51.4m, as well as more liquid assets than liabilities. So while Xiangtan Yongda Machinery Manufacturing does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Xiangtan Yongda Machinery Manufacturing that you should be aware of before investing here.

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.