Does Jiangling Motors Corporation (SZSE:000550) Have A Healthy Balance Sheet?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Jiangling Motors Corporation, Ltd. (SZSE:000550) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Jiangling Motors Corporation

What Is Jiangling Motors Corporation's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Jiangling Motors Corporation had CN¥512.5m of debt in June 2024, down from CN¥1.31b, one year before. However, its balance sheet shows it holds CN¥11.2b in cash, so it actually has CN¥10.7b net cash.

A Look At Jiangling Motors Corporation's Liabilities

We can see from the most recent balance sheet that Jiangling Motors Corporation had liabilities of CN¥19.1b falling due within a year, and liabilities of CN¥750.1m due beyond that. Offsetting this, it had CN¥11.2b in cash and CN¥5.04b in receivables that were due within 12 months. So it has liabilities totalling CN¥3.58b more than its cash and near-term receivables, combined.

Of course, Jiangling Motors Corporation has a market capitalization of CN¥18.5b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Jiangling Motors Corporation also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Jiangling Motors Corporation turned things around in the last 12 months, delivering and EBIT of CN¥422m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jiangling Motors Corporation's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Jiangling Motors Corporation has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Jiangling Motors Corporation actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Jiangling Motors Corporation's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥10.7b. And it impressed us with free cash flow of CN¥2.2b, being 525% of its EBIT. So we don't think Jiangling Motors Corporation's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Jiangling Motors Corporation that you should be aware of before investing here.

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.

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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.