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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Jiangling Motors Corporation, Ltd. (SZSE:000550) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 think about a company's use of debt, we first look at cash and debt together.

View 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¥599.6m of debt in September 2024, down from CN¥1.39b, one year before. However, its balance sheet shows it holds CN¥11.3b in cash, so it actually has CN¥10.7b net cash.

How Healthy Is Jiangling Motors Corporation's Balance Sheet?

The latest balance sheet data shows that Jiangling Motors Corporation had liabilities of CN¥18.7b due within a year, and liabilities of CN¥788.4m falling due after that. On the other hand, it had cash of CN¥11.3b and CN¥4.70b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.48b.

This deficit isn't so bad because Jiangling Motors Corporation is worth CN¥14.4b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

Although Jiangling Motors Corporation made a loss at the EBIT level, last year, it was also good to see that it generated CN¥617m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. 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. Jiangling Motors Corporation 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. Happily for any shareholders, Jiangling Motors Corporation actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Jiangling Motors Corporation does have more liabilities than liquid assets, it also has net cash of CN¥10.7b. The cherry on top was that in converted 373% of that EBIT to free cash flow, bringing in CN¥2.3b. So is Jiangling Motors Corporation's debt a risk? It doesn't seem so to us. 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 2 warning signs for Jiangling Motors Corporation 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.

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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.