Is Lifan Technology(Group)Co.Ltd (SHSE:601777) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Lifan Technology(Group)Co.,Ltd. (SHSE:601777) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Lifan Technology(Group)Co.Ltd

How Much Debt Does Lifan Technology(Group)Co.Ltd Carry?

As you can see below, Lifan Technology(Group)Co.Ltd had CN¥2.80b of debt at September 2023, down from CN¥3.03b a year prior. However, its balance sheet shows it holds CN¥3.15b in cash, so it actually has CN¥354.2m net cash.

How Healthy Is Lifan Technology(Group)Co.Ltd's Balance Sheet?

According to the last reported balance sheet, Lifan Technology(Group)Co.Ltd had liabilities of CN¥9.17b due within 12 months, and liabilities of CN¥2.78b due beyond 12 months. On the other hand, it had cash of CN¥3.15b and CN¥4.30b worth of receivables due within a year. So its liabilities total CN¥4.49b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Lifan Technology(Group)Co.Ltd has a market capitalization of CN¥14.6b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Lifan Technology(Group)Co.Ltd also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Lifan Technology(Group)Co.Ltd'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.

Over 12 months, Lifan Technology(Group)Co.Ltd reported revenue of CN¥7.7b, which is a gain of 14%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Lifan Technology(Group)Co.Ltd?

Although Lifan Technology(Group)Co.Ltd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥64m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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 Lifan Technology(Group)Co.Ltd that you should be aware of.

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.

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.