We Think Loncin Motor (SHSE:603766) Can Manage Its Debt With Ease

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Loncin Motor Co., Ltd. (SHSE:603766) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Loncin Motor

How Much Debt Does Loncin Motor Carry?

You can click the graphic below for the historical numbers, but it shows that Loncin Motor had CN¥301.3m of debt in September 2024, down from CN¥674.7m, one year before. But on the other hand it also has CN¥5.81b in cash, leading to a CN¥5.50b net cash position.

How Strong Is Loncin Motor's Balance Sheet?

We can see from the most recent balance sheet that Loncin Motor had liabilities of CN¥5.64b falling due within a year, and liabilities of CN¥285.3m due beyond that. On the other hand, it had cash of CN¥5.81b and CN¥2.38b worth of receivables due within a year. So it actually has CN¥2.26b more liquid assets than total liabilities.

This short term liquidity is a sign that Loncin Motor could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Loncin Motor has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Loncin Motor grew its EBIT by 39% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Loncin Motor can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Loncin Motor may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Loncin Motor 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.

Summing Up

While it is always sensible to investigate a company's debt, in this case Loncin Motor has CN¥5.50b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥842m, being 126% of its EBIT. So we don't think Loncin Motor's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Loncin Motor 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.