These 4 Measures Indicate That Shandong Molong Petroleum Machinery (HKG:568) Is Using Debt Reasonably Well

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Shandong Molong Petroleum Machinery Company Limited (HKG:568) makes use of debt. But the real question is whether this debt is making the company risky.

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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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Shandong Molong Petroleum Machinery's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Shandong Molong Petroleum Machinery had CN¥1.38b of debt in September 2025, down from CN¥1.51b, one year before. However, it also had CN¥232.0m in cash, and so its net debt is CN¥1.14b.

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¥1.98b due within 12 months and liabilities of CN¥48.9m due beyond that. Offsetting these obligations, it had cash of CN¥232.0m as well as receivables valued at CN¥1.02b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥779.2m.

Since publicly traded Shandong Molong Petroleum Machinery shares are worth a total of CN¥5.90b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

View our latest analysis for Shandong Molong Petroleum Machinery

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Weak interest cover of 0.038 times and a disturbingly high net debt to EBITDA ratio of 11.0 hit our confidence in Shandong Molong Petroleum Machinery like a one-two punch to the gut. The debt burden here is substantial. One redeeming factor for Shandong Molong Petroleum Machinery is that it turned last year's EBIT loss into a gain of CN¥14m, over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shandong Molong Petroleum Machinery'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, Shandong Molong Petroleum Machinery actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

We weren't impressed with Shandong Molong Petroleum Machinery's net debt to EBITDA, and its interest cover made us cautious. But its conversion of EBIT to free cash flow was significantly redeeming. Looking at all this data makes us feel a little cautious about Shandong Molong Petroleum Machinery's debt levels. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more risky. 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 example, we've discovered 1 warning sign for Shandong Molong Petroleum Machinery 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.