Does Shandong Molong Petroleum Machinery (HKG:568) Have A Healthy Balance Sheet?

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.' 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 Shandong Molong Petroleum Machinery Company Limited (HKG:568) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Shandong Molong Petroleum Machinery's Debt?

You can click the graphic below for the historical numbers, but it shows that Shandong Molong Petroleum Machinery had CN¥1.51b of debt in September 2024, down from CN¥1.76b, one year before. However, because it has a cash reserve of CN¥89.1m, its net debt is less, at about CN¥1.42b.

A Look At Shandong Molong Petroleum Machinery's Liabilities

Zooming in on the latest balance sheet data, we can see that Shandong Molong Petroleum Machinery had liabilities of CN¥2.25b due within 12 months and liabilities of CN¥25.3m due beyond that. On the other hand, it had cash of CN¥89.1m and CN¥664.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.52b.

This deficit is considerable relative to its market capitalization of CN¥2.12b, so it does suggest shareholders should keep an eye on Shandong Molong Petroleum Machinery's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shandong Molong Petroleum Machinery'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.

See our latest analysis for Shandong Molong Petroleum Machinery

Over 12 months, Shandong Molong Petroleum Machinery made a loss at the EBIT level, and saw its revenue drop to CN¥1.3b, which is a fall of 15%. We would much prefer see growth.

Caveat Emptor

Not only did Shandong Molong Petroleum Machinery's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥112m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CN¥255m. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Shandong Molong Petroleum Machinery has 1 warning sign we think 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.