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. As with many other companies Sany Heavy Equipment International Holdings Company Limited (HKG:631) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Sany Heavy Equipment International Holdings

What Is Sany Heavy Equipment International Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Sany Heavy Equipment International Holdings had debt of CN¥4.02b, up from CN¥3.28b in one year. But it also has CN¥5.11b in cash to offset that, meaning it has CN¥1.09b net cash.

A Look At Sany Heavy Equipment International Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Sany Heavy Equipment International Holdings had liabilities of CN¥11.7b due within 12 months and liabilities of CN¥2.15b due beyond that. On the other hand, it had cash of CN¥5.11b and CN¥7.02b worth of receivables due within a year. So its liabilities total CN¥1.73b more than the combination of its cash and short-term receivables.

Of course, Sany Heavy Equipment International Holdings has a market capitalization of CN¥23.2b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Sany Heavy Equipment International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Sany Heavy Equipment International Holdings grew its EBIT by 31% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Sany Heavy Equipment International Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Sany Heavy Equipment International Holdings 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. Looking at the most recent three years, Sany Heavy Equipment International Holdings recorded free cash flow of 39% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Sany Heavy Equipment International Holdings has CN¥1.09b in net cash. And we liked the look of last year's 31% year-on-year EBIT growth. So is Sany Heavy Equipment International Holdings's debt a risk? It doesn't seem so to us. 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 1 warning sign for Sany Heavy Equipment International Holdings that you should be aware of.

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.