Here's Why Rayhoo Motor DiesLtd (SZSE:002997) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Rayhoo Motor Dies Co.,Ltd. (SZSE:002997) 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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Rayhoo Motor DiesLtd

What Is Rayhoo Motor DiesLtd's Debt?

As you can see below, Rayhoo Motor DiesLtd had CN¥448.6m of debt at March 2024, down from CN¥508.0m a year prior. However, its balance sheet shows it holds CN¥782.9m in cash, so it actually has CN¥334.3m net cash.

How Healthy Is Rayhoo Motor DiesLtd's Balance Sheet?

The latest balance sheet data shows that Rayhoo Motor DiesLtd had liabilities of CN¥2.90b due within a year, and liabilities of CN¥346.9m falling due after that. Offsetting this, it had CN¥782.9m in cash and CN¥811.5m in receivables that were due within 12 months. So it has liabilities totalling CN¥1.65b more than its cash and near-term receivables, combined.

Rayhoo Motor DiesLtd has a market capitalization of CN¥7.27b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Rayhoo Motor DiesLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Rayhoo Motor DiesLtd has boosted its EBIT by 53%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Rayhoo Motor DiesLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Rayhoo Motor DiesLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Rayhoo Motor DiesLtd 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

Although Rayhoo Motor DiesLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥334.3m. And we liked the look of last year's 53% year-on-year EBIT growth. So we are not troubled with Rayhoo Motor DiesLtd's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Rayhoo Motor DiesLtd (of which 1 is significant!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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