Jiangling Motors Corporation (SZSE:000550) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Jiangling Motors Corporation, Ltd. (SZSE:000550) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 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.

View our latest analysis for Jiangling Motors Corporation

What Is Jiangling Motors Corporation's Debt?

The image below, which you can click on for greater detail, shows that Jiangling Motors Corporation had debt of CN¥494.0m at the end of March 2024, a reduction from CN¥1.79b over a year. However, its balance sheet shows it holds CN¥10.3b in cash, so it actually has CN¥9.80b net cash.

A Look At Jiangling Motors Corporation's Liabilities

According to the last reported balance sheet, Jiangling Motors Corporation had liabilities of CN¥16.8b due within 12 months, and liabilities of CN¥702.3m due beyond 12 months. Offsetting these obligations, it had cash of CN¥10.3b as well as receivables valued at CN¥4.17b due within 12 months. So its liabilities total CN¥3.07b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Jiangling Motors Corporation is worth CN¥14.5b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. 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!

Although Jiangling Motors Corporation made a loss at the EBIT level, last year, it was also good to see that it generated CN¥304m in EBIT over the last twelve months. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Jiangling Motors Corporation does have more liabilities than liquid assets, it also has net cash of CN¥9.80b. The cherry on top was that in converted 1,163% of that EBIT to free cash flow, bringing in CN¥3.5b. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Jiangling Motors Corporation you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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