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. Importantly, SINOMACH HEAVY EQUIPMENT GROUP CO.,LTD (SHSE:601399) does carry debt. But is this debt a concern to shareholders?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does SINOMACH HEAVY EQUIPMENT GROUPLTD Carry?

The image below, which you can click on for greater detail, shows that SINOMACH HEAVY EQUIPMENT GROUPLTD had debt of CN¥3.01b at the end of September 2024, a reduction from CN¥3.50b over a year. However, its balance sheet shows it holds CN¥7.71b in cash, so it actually has CN¥4.71b net cash.

A Look At SINOMACH HEAVY EQUIPMENT GROUPLTD's Liabilities

The latest balance sheet data shows that SINOMACH HEAVY EQUIPMENT GROUPLTD had liabilities of CN¥13.5b due within a year, and liabilities of CN¥3.36b falling due after that. Offsetting this, it had CN¥7.71b in cash and CN¥7.95b in receivables that were due within 12 months. So it has liabilities totalling CN¥1.20b more than its cash and near-term receivables, combined.

Given SINOMACH HEAVY EQUIPMENT GROUPLTD has a market capitalization of CN¥23.8b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 461% 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While SINOMACH HEAVY EQUIPMENT GROUPLTD 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. 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¥4.71b in net cash. And it impressed us with free cash flow of CN¥636m, being 194% of its EBIT. So we don't think SINOMACH HEAVY EQUIPMENT GROUPLTD's use of debt is risky. 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.

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.