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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Keli Motor Group Co., Ltd. (SZSE:002892) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Keli Motor Group Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Keli Motor Group had debt of CN¥284.3m, up from CN¥167.5m in one year. However, its balance sheet shows it holds CN¥509.6m in cash, so it actually has CN¥225.4m net cash.

A Look At Keli Motor Group's Liabilities

We can see from the most recent balance sheet that Keli Motor Group had liabilities of CN¥624.4m falling due within a year, and liabilities of CN¥259.9m due beyond that. Offsetting these obligations, it had cash of CN¥509.6m as well as receivables valued at CN¥508.6m due within 12 months. So it can boast CN¥133.9m more liquid assets than total liabilities.

This state of affairs indicates that Keli Motor Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥7.71b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Keli Motor Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Keli Motor Group grew its EBIT by 82% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Keli Motor Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 that may be a result of expenditure for growth, it does make the debt far 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¥225.4m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 82% over the last year. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Keli Motor Group you should be aware of, and 1 of them can't be ignored.

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.