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. We note that Jiangling Motors Corporation, Ltd. (SZSE:000550) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Jiangling Motors Corporation Carry?

You can click the graphic below for the historical numbers, but it shows that Jiangling Motors Corporation had CN¥599.6m of debt in September 2024, down from CN¥1.39b, one year before. But it also has CN¥11.3b in cash to offset that, meaning it has CN¥10.7b net cash.

A Look At Jiangling Motors Corporation's Liabilities

We can see from the most recent balance sheet that Jiangling Motors Corporation had liabilities of CN¥18.7b falling due within a year, and liabilities of CN¥788.4m due beyond that. Offsetting these obligations, it had cash of CN¥11.3b as well as receivables valued at CN¥4.70b due within 12 months. So its liabilities total CN¥3.48b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Jiangling Motors Corporation has a market capitalization of CN¥16.0b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Jiangling Motors Corporation also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Jiangling Motors Corporation turned things around in the last 12 months, delivering and EBIT of CN¥617m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jiangling Motors Corporation can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Jiangling Motors Corporation 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 year, Jiangling Motors Corporation actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Jiangling Motors Corporation's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥10.7b. And it impressed us with free cash flow of CN¥2.3b, being 373% of its EBIT. So we don't think Jiangling Motors Corporation's use of debt is risky. 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. For instance, we've identified 2 warning signs for Jiangling Motors Corporation that you should be aware of.

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.