Does Jiangsu Leili Motor (SZSE:300660) Have A Healthy Balance Sheet?

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 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. As with many other companies Jiangsu Leili Motor Co., Ltd (SZSE:300660) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

View our latest analysis for Jiangsu Leili Motor

What Is Jiangsu Leili Motor's Debt?

As you can see below, at the end of September 2024, Jiangsu Leili Motor had CN¥825.0m of debt, up from CN¥269.7m a year ago. Click the image for more detail. However, it does have CN¥1.93b in cash offsetting this, leading to net cash of CN¥1.10b.

How Healthy Is Jiangsu Leili Motor's Balance Sheet?

According to the last reported balance sheet, Jiangsu Leili Motor had liabilities of CN¥2.33b due within 12 months, and liabilities of CN¥65.5m due beyond 12 months. On the other hand, it had cash of CN¥1.93b and CN¥1.55b worth of receivables due within a year. So it can boast CN¥1.08b more liquid assets than total liabilities.

This short term liquidity is a sign that Jiangsu Leili Motor could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Jiangsu Leili Motor boasts net cash, so it's fair to say it does not have a heavy debt load!

While Jiangsu Leili Motor doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 Jiangsu Leili Motor'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, a company can only pay off debt with cold hard cash, not accounting profits. While Jiangsu Leili Motor 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, Jiangsu Leili Motor 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 it is always sensible to investigate a company's debt, in this case Jiangsu Leili Motor has CN¥1.10b in net cash and a decent-looking balance sheet. So we are not troubled with Jiangsu Leili Motor's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Jiangsu Leili Motor you should be aware of, and 1 of them doesn't sit too well with us.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.