Jiangxi Special Electric MotorLtd (SZSE:002176) Is Carrying A Fair Bit Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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, Jiangxi Special Electric Motor Co.,Ltd (SZSE:002176) does carry debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Jiangxi Special Electric MotorLtd had debt of CN¥1.45b, up from CN¥919.0m in one year. However, it also had CN¥467.9m in cash, and so its net debt is CN¥984.3m.

How Strong Is Jiangxi Special Electric MotorLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangxi Special Electric MotorLtd had liabilities of CN¥1.92b due within 12 months and liabilities of CN¥846.6m due beyond that. On the other hand, it had cash of CN¥467.9m and CN¥1.07b worth of receivables due within a year. So its liabilities total CN¥1.23b more than the combination of its cash and short-term receivables.

Since publicly traded Jiangxi Special Electric MotorLtd shares are worth a total of CN¥13.6b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Jiangxi Special Electric MotorLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.5b, which is a fall of 66%. That makes us nervous, to say the least.

Caveat Emptor

While Jiangxi Special Electric MotorLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥535m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥852m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Jiangxi Special Electric MotorLtd's profit, revenue, and operating cashflow have changed over the last few years.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.