Is Zhejiang Qianjiang Motorcycle (SZSE:000913) A Risky Investment?

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. We note that Zhejiang Qianjiang Motorcycle Co., Ltd. (SZSE:000913) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Zhejiang Qianjiang Motorcycle

What Is Zhejiang Qianjiang Motorcycle's Debt?

As you can see below, at the end of June 2024, Zhejiang Qianjiang Motorcycle had CN¥308.1m of debt, up from CN¥25.6m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥5.86b in cash, so it actually has CN¥5.55b net cash.

How Healthy Is Zhejiang Qianjiang Motorcycle's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhejiang Qianjiang Motorcycle had liabilities of CN¥3.73b due within 12 months and liabilities of CN¥1.61b due beyond that. Offsetting these obligations, it had cash of CN¥5.86b as well as receivables valued at CN¥668.1m due within 12 months. So it can boast CN¥1.19b more liquid assets than total liabilities.

This surplus suggests that Zhejiang Qianjiang Motorcycle has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Zhejiang Qianjiang Motorcycle has more cash than debt is arguably a good indication that it can manage its debt safely.

Zhejiang Qianjiang Motorcycle's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of 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 Zhejiang Qianjiang Motorcycle can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Zhejiang Qianjiang Motorcycle 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 three years, Zhejiang Qianjiang Motorcycle actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang Qianjiang Motorcycle has CN¥5.55b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 148% of that EBIT to free cash flow, bringing in CN¥740m. So is Zhejiang Qianjiang Motorcycle'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. For example - Zhejiang Qianjiang Motorcycle has 1 warning sign we think 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.