Is Rayhoo Motor DiesLtd (SZSE:002997) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Rayhoo Motor Dies Co.,Ltd. (SZSE:002997) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Rayhoo Motor DiesLtd

How Much Debt Does Rayhoo Motor DiesLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Rayhoo Motor DiesLtd had CN¥367.8m of debt in September 2024, down from CN¥604.8m, one year before. But it also has CN¥620.1m in cash to offset that, meaning it has CN¥252.3m net cash.

How Healthy Is Rayhoo Motor DiesLtd's Balance Sheet?

According to the last reported balance sheet, Rayhoo Motor DiesLtd had liabilities of CN¥3.02b due within 12 months, and liabilities of CN¥331.3m due beyond 12 months. Offsetting this, it had CN¥620.1m in cash and CN¥869.6m in receivables that were due within 12 months. So its liabilities total CN¥1.87b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Rayhoo Motor DiesLtd has a market capitalization of CN¥7.71b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Rayhoo Motor DiesLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Rayhoo Motor DiesLtd grew its EBIT by 88% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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. Over the last three years, Rayhoo Motor DiesLtd saw substantial negative free cash flow, in total. 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¥252.3m. And we liked the look of last year's 88% year-on-year EBIT growth. So we don't have any problem with Rayhoo Motor DiesLtd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 concerning!) you should know about.

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.