Health Check: How Prudently Does Jiangling Motors Corporation (SZSE:000550) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Jiangling Motors Corporation

How Much Debt Does Jiangling Motors Corporation Carry?

As you can see below, Jiangling Motors Corporation had CN¥1.39b of debt at September 2023, down from CN¥1.87b a year prior. But on the other hand it also has CN¥10.2b in cash, leading to a CN¥8.83b net cash position.

How Healthy Is Jiangling Motors Corporation's Balance Sheet?

According to the last reported balance sheet, Jiangling Motors Corporation had liabilities of CN¥17.7b due within 12 months, and liabilities of CN¥654.1m due beyond 12 months. On the other hand, it had cash of CN¥10.2b and CN¥5.03b worth of receivables due within a year. So it has liabilities totalling CN¥3.15b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Jiangling Motors Corporation has a market capitalization of CN¥15.1b, 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. Despite its noteworthy liabilities, Jiangling Motors Corporation boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year Jiangling Motors Corporation's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is Jiangling Motors Corporation?

Although Jiangling Motors Corporation had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥1.2b. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. To that end, you should be aware of the 2 warning signs we've spotted with Jiangling Motors Corporation .

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.