Is Zhejiang Qianjiang Motorcycle (SZSE:000913) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Zhejiang Qianjiang Motorcycle Co., Ltd. (SZSE:000913) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Zhejiang Qianjiang Motorcycle

How Much Debt Does Zhejiang Qianjiang Motorcycle Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Zhejiang Qianjiang Motorcycle had debt of CN¥209.1m, up from CN¥17.8m in one year. But it also has CN¥5.41b in cash to offset that, meaning it has CN¥5.20b net cash.

How Healthy Is Zhejiang Qianjiang Motorcycle's Balance Sheet?

According to the last reported balance sheet, Zhejiang Qianjiang Motorcycle had liabilities of CN¥3.22b due within 12 months, and liabilities of CN¥1.51b due beyond 12 months. Offsetting these obligations, it had cash of CN¥5.41b as well as receivables valued at CN¥622.0m due within 12 months. So it actually has CN¥1.30b 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. Succinctly put, Zhejiang Qianjiang Motorcycle boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Zhejiang Qianjiang Motorcycle has seen its EBIT plunge 17% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang Qianjiang Motorcycle has CN¥5.20b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥308m, being 90% of its EBIT. So we don't think Zhejiang Qianjiang Motorcycle's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Zhejiang Qianjiang Motorcycle that you should be aware of.

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.