These 4 Measures Indicate That Keli Motor Group (SZSE:002892) Is Using Debt Reasonably Well

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Keli Motor Group Co., Ltd. (SZSE:002892) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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. 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 Keli Motor Group

How Much Debt Does Keli Motor Group Carry?

As you can see below, at the end of March 2024, Keli Motor Group had CN¥279.1m of debt, up from CN¥146.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥536.4m in cash, so it actually has CN¥257.3m net cash.

How Healthy Is Keli Motor Group's Balance Sheet?

According to the last reported balance sheet, Keli Motor Group had liabilities of CN¥539.3m due within 12 months, and liabilities of CN¥225.4m due beyond 12 months. Offsetting this, it had CN¥536.4m in cash and CN¥394.8m in receivables that were due within 12 months. So it can boast CN¥166.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Keli Motor Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Keli Motor Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Importantly, Keli Motor Group grew its EBIT by 65% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Keli Motor Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Keli Motor Group 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. During the last three years, Keli Motor Group burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Keli Motor Group has net cash of CN¥257.3m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 65% over the last year. So we are not troubled with Keli Motor Group's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Keli Motor Group (of which 2 can't be ignored!) you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com