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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Senci Electric Machinery Co.,Ltd. (SHSE:603109) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Senci Electric MachineryLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Senci Electric MachineryLtd had CN¥250.0m of debt in September 2024, down from CN¥335.0m, one year before. However, its balance sheet shows it holds CN¥1.02b in cash, so it actually has CN¥766.9m net cash.

How Healthy Is Senci Electric MachineryLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Senci Electric MachineryLtd had liabilities of CN¥1.05b due within 12 months and liabilities of CN¥363.8m due beyond that. Offsetting this, it had CN¥1.02b in cash and CN¥580.0m in receivables that were due within 12 months. So it can boast CN¥184.1m more liquid assets than total liabilities.

This surplus suggests that Senci Electric MachineryLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Senci Electric MachineryLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Senci Electric MachineryLtd's load is not too heavy, because its EBIT was down 37% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Senci Electric MachineryLtd'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. Senci Electric MachineryLtd 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. Over the most recent three years, Senci Electric MachineryLtd recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Senci Electric MachineryLtd has net cash of CN¥766.9m, as well as more liquid assets than liabilities. So we don't have any problem with Senci Electric MachineryLtd's use of debt. 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 Senci Electric MachineryLtd (1 is a bit concerning!) 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.