Does Jiangxi Special Electric MotorLtd (SZSE:002176) Have A Healthy Balance Sheet?

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. As with many other companies Jiangxi Special Electric Motor Co.,Ltd (SZSE:002176) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Jiangxi Special Electric MotorLtd

What Is Jiangxi Special Electric MotorLtd's Debt?

The image below, which you can click on for greater detail, shows that Jiangxi Special Electric MotorLtd had debt of CN¥919.0m at the end of September 2023, a reduction from CN¥1.40b over a year. But on the other hand it also has CN¥1.25b in cash, leading to a CN¥326.4m net cash position.

A Look At Jiangxi Special Electric MotorLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Jiangxi Special Electric MotorLtd had liabilities of CN¥1.70b due within 12 months and liabilities of CN¥790.3m due beyond that. Offsetting these obligations, it had cash of CN¥1.25b as well as receivables valued at CN¥1.29b due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Jiangxi Special Electric MotorLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥17.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Jiangxi Special Electric MotorLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Jiangxi Special Electric MotorLtd if management cannot prevent a repeat of the 80% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is Jiangxi Special Electric MotorLtd'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jiangxi Special Electric MotorLtd 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 most recent three years, Jiangxi Special Electric MotorLtd recorded free cash flow worth 74% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jiangxi Special Electric MotorLtd has CN¥326.4m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 74% of that EBIT to free cash flow, bringing in CN¥1.3b. So we don't have any problem with Jiangxi Special Electric MotorLtd's use of debt. 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. For example, we've discovered 2 warning signs for Jiangxi Special Electric MotorLtd that you should be aware of before investing here.

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.