Is Xiamen King Long Motor Group (SHSE:600686) Weighed On By Its Debt Load?

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 Xiamen King Long Motor Group Co., Ltd. (SHSE:600686) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Xiamen King Long Motor Group

What Is Xiamen King Long Motor Group's Net Debt?

As you can see below, Xiamen King Long Motor Group had CN¥5.69b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds CN¥8.32b in cash, so it actually has CN¥2.64b net cash.

How Strong Is Xiamen King Long Motor Group's Balance Sheet?

We can see from the most recent balance sheet that Xiamen King Long Motor Group had liabilities of CN¥17.8b falling due within a year, and liabilities of CN¥5.88b due beyond that. Offsetting these obligations, it had cash of CN¥8.32b as well as receivables valued at CN¥5.65b due within 12 months. So its liabilities total CN¥9.66b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CN¥9.87b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Xiamen King Long Motor Group also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Xiamen King Long Motor Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Xiamen King Long Motor Group made a loss at the EBIT level, and saw its revenue drop to CN¥20b, which is a fall of 9.5%. That's not what we would hope to see.

So How Risky Is Xiamen King Long Motor Group?

While Xiamen King Long Motor Group lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥95m. 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Xiamen King Long Motor Group (including 1 which is potentially serious) .

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.