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. We can see that Lifan Technology(Group)Co.,Ltd. (SHSE:601777) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, 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.

What Is Lifan Technology(Group)Co.Ltd's Debt?

You can click the graphic below for the historical numbers, but it shows that Lifan Technology(Group)Co.Ltd had CN¥2.01b of debt in September 2024, down from CN¥2.80b, one year before. But it also has CN¥3.24b in cash to offset that, meaning it has CN¥1.23b net cash.

How Healthy Is Lifan Technology(Group)Co.Ltd's Balance Sheet?

We can see from the most recent balance sheet that Lifan Technology(Group)Co.Ltd had liabilities of CN¥7.12b falling due within a year, and liabilities of CN¥1.97b due beyond that. On the other hand, it had cash of CN¥3.24b and CN¥1.60b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥4.26b.

Since publicly traded Lifan Technology(Group)Co.Ltd shares are worth a total of CN¥32.0b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Lifan Technology(Group)Co.Ltd also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Lifan Technology(Group)Co.Ltd 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.

In the last year Lifan Technology(Group)Co.Ltd had a loss before interest and tax, and actually shrunk its revenue by 5.5%, to CN¥7.3b. We would much prefer see growth.

So How Risky Is Lifan Technology(Group)Co.Ltd?

While Lifan Technology(Group)Co.Ltd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥2.4m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Lifan Technology(Group)Co.Ltd that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.