Is Jiangsu Leili Motor (SZSE:300660) Using Too Much Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Jiangsu Leili Motor Co., Ltd (SZSE:300660) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Net Debt?

As you can see below, at the end of June 2024, Jiangsu Leili Motor had CN¥772.8m of debt, up from CN¥419.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.91b in cash, so it actually has CN¥1.14b net cash.

How Strong Is Jiangsu Leili Motor's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu Leili Motor had liabilities of CN¥2.22b due within 12 months and liabilities of CN¥69.2m due beyond that. Offsetting this, it had CN¥1.91b in cash and CN¥1.51b in receivables that were due within 12 months. So it can boast CN¥1.13b more liquid assets than total liabilities.

This surplus suggests that Jiangsu Leili Motor has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Jiangsu Leili Motor boasts net cash, so it's fair to say it does not have a heavy debt load!

Jiangsu Leili Motor's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Jiangsu Leili Motor can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Jiangsu Leili Motor 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, Jiangsu Leili Motor recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangsu Leili Motor has net cash of CN¥1.14b, as well as more liquid assets than liabilities. So we are not troubled with Jiangsu Leili Motor's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Jiangsu Leili Motor is showing 1 warning sign in our investment analysis , 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.