Rayhoo Motor DiesLtd (SZSE:002997) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Rayhoo Motor Dies Co.,Ltd. (SZSE:002997) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its 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 as of September 2023 Rayhoo Motor DiesLtd had CN¥604.8m of debt, an increase on CN¥385.8m, over one year. But on the other hand it also has CN¥939.9m in cash, leading to a CN¥335.2m net cash position.

How Healthy Is Rayhoo Motor DiesLtd's Balance Sheet?

We can see from the most recent balance sheet that Rayhoo Motor DiesLtd had liabilities of CN¥2.90b falling due within a year, and liabilities of CN¥513.8m due beyond that. On the other hand, it had cash of CN¥939.9m and CN¥685.7m worth of receivables due within a year. So it has liabilities totalling CN¥1.79b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Rayhoo Motor DiesLtd has a market capitalization of CN¥6.05b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Rayhoo Motor DiesLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Rayhoo Motor DiesLtd has boosted its EBIT by 68%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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. While Rayhoo Motor DiesLtd 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 last three years, Rayhoo Motor DiesLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is 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¥335.2m. And we liked the look of last year's 68% year-on-year EBIT growth. So we are not troubled with Rayhoo Motor DiesLtd'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 3 warning signs for Rayhoo Motor DiesLtd (of which 1 is concerning!) 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.