Warren Buffett famously said, '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 Keli Motor Group Co., Ltd. (SZSE:002892) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Keli Motor Group's Net Debt?

As you can see below, at the end of March 2024, Keli Motor Group had CN¥279.1m of debt, up from CN¥146.0m a year ago. Click the image for more detail. But on the other hand it also has CN¥536.4m in cash, leading to a CN¥257.3m net cash position.

A Look At Keli Motor Group's Liabilities

The latest balance sheet data shows that Keli Motor Group had liabilities of CN¥539.3m due within a year, and liabilities of CN¥225.4m falling due after that. Offsetting this, it had CN¥536.4m in cash and CN¥394.8m in receivables that were due within 12 months. So it can boast CN¥166.4m more liquid assets than total liabilities.

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

It is well worth noting that Keli Motor Group's EBIT shot up like bamboo after rain, gaining 65% in the last twelve months. That'll make it easier to manage its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Keli Motor Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Keli Motor Group 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, Keli Motor Group 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

While we empathize with investors who find debt concerning, you should keep in mind that Keli Motor Group has net cash of CN¥257.3m, as well as more liquid assets than liabilities. And we liked the look of last year's 65% year-on-year EBIT growth. So we don't have any problem with Keli Motor Group's use of debt. 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. We've identified 4 warning signs with Keli Motor Group (at least 2 which are a bit unpleasant) , and understanding them should be part of your investment process.

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.