Is Kingclean ElectricLtd (SHSE:603355) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Kingclean Electric Co.,Ltd (SHSE:603355) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

See our latest analysis for Kingclean ElectricLtd

What Is Kingclean ElectricLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Kingclean ElectricLtd had CN¥5.10b of debt, an increase on CN¥3.91b, over one year. However, its balance sheet shows it holds CN¥6.17b in cash, so it actually has CN¥1.08b net cash.

A Look At Kingclean ElectricLtd's Liabilities

We can see from the most recent balance sheet that Kingclean ElectricLtd had liabilities of CN¥6.10b falling due within a year, and liabilities of CN¥2.00b due beyond that. Offsetting these obligations, it had cash of CN¥6.17b as well as receivables valued at CN¥2.45b due within 12 months. So it actually has CN¥521.8m more liquid assets than total liabilities.

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

Also positive, Kingclean ElectricLtd grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. 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 Kingclean ElectricLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Kingclean ElectricLtd 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, Kingclean ElectricLtd produced sturdy free cash flow equating to 56% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Kingclean ElectricLtd has net cash of CN¥1.08b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 24% over the last year. So we don't think Kingclean ElectricLtd's use of debt is risky. 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. We've identified 1 warning sign with Kingclean ElectricLtd , and understanding them should be part of your investment process.

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.