We Think Kingclean ElectricLtd (SHSE:603355) Can Manage Its Debt With Ease

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Kingclean ElectricLtd

How Much Debt Does Kingclean ElectricLtd Carry?

As you can see below, at the end of March 2024, Kingclean ElectricLtd had CN¥6.17b of debt, up from CN¥3.64b a year ago. Click the image for more detail. However, it does have CN¥6.76b in cash offsetting this, leading to net cash of CN¥596.5m.

How Healthy Is Kingclean ElectricLtd's Balance Sheet?

The latest balance sheet data shows that Kingclean ElectricLtd had liabilities of CN¥7.47b due within a year, and liabilities of CN¥1.61b falling due after that. Offsetting this, it had CN¥6.76b in cash and CN¥2.27b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Kingclean ElectricLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥15.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Kingclean ElectricLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Kingclean ElectricLtd grew its EBIT at 16% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Kingclean ElectricLtd 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.

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. Over the most recent three years, Kingclean ElectricLtd recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Kingclean ElectricLtd has CN¥596.5m in net cash. And it impressed us with free cash flow of CN¥549m, being 72% of its EBIT. So is Kingclean ElectricLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Kingclean ElectricLtd is showing 1 warning sign in our investment analysis , you should know about...

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.