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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that Lifan Technology(Group)Co.,Ltd. (SHSE:601777) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

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

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

The image below, which you can click on for greater detail, shows that at March 2024 Lifan Technology(Group)Co.Ltd had debt of CN¥2.56b, up from CN¥2.17b in one year. However, its balance sheet shows it holds CN¥3.32b in cash, so it actually has CN¥763.9m net cash.

How Strong 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¥7.58b due within 12 months, and liabilities of CN¥2.17b due beyond 12 months. Offsetting these obligations, it had cash of CN¥3.32b as well as receivables valued at CN¥1.80b due within 12 months. So its liabilities total CN¥4.63b 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¥20.0b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Lifan Technology(Group)Co.Ltd will need earnings to service that debt. 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 made a loss at the EBIT level, and saw its revenue drop to CN¥7.1b, which is a fall of 17%. That's not what we would hope to see.

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

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Lifan Technology(Group)Co.Ltd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥790m and booked a CN¥1.0m accounting loss. Given it only has net cash of CN¥763.9m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. 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.

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.

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