Is Beiqi Foton MotorLtd (SHSE:600166) A Risky Investment?

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. Importantly, Beiqi Foton Motor Co.,Ltd. (SHSE:600166) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

View our latest analysis for Beiqi Foton MotorLtd

What Is Beiqi Foton MotorLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Beiqi Foton MotorLtd had CN¥4.47b of debt, an increase on CN¥4.27b, over one year. But it also has CN¥8.42b in cash to offset that, meaning it has CN¥3.95b net cash.

How Strong Is Beiqi Foton MotorLtd's Balance Sheet?

According to the last reported balance sheet, Beiqi Foton MotorLtd had liabilities of CN¥32.3b due within 12 months, and liabilities of CN¥5.25b due beyond 12 months. Offsetting this, it had CN¥8.42b in cash and CN¥10.5b in receivables that were due within 12 months. So it has liabilities totalling CN¥18.7b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's CN¥18.6b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Beiqi Foton MotorLtd boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Beiqi Foton MotorLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Beiqi Foton MotorLtd saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

So How Risky Is Beiqi Foton MotorLtd?

Although Beiqi Foton MotorLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥718m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Beiqi Foton MotorLtd you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.