David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 MotoMotion China Corporation (SZSE:301061) does use debt in its business. But should shareholders be worried about its use of debt?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is MotoMotion China's Debt?

As you can see below, at the end of September 2024, MotoMotion China had CN¥54.8m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥2.15b in cash, leading to a CN¥2.09b net cash position.

How Healthy Is MotoMotion China's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MotoMotion China had liabilities of CN¥641.8m due within 12 months and liabilities of CN¥31.3m due beyond that. Offsetting this, it had CN¥2.15b in cash and CN¥362.4m in receivables that were due within 12 months. So it actually has CN¥1.84b more liquid assets than total liabilities.

It's good to see that MotoMotion China has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, MotoMotion China boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that MotoMotion China has boosted its EBIT by 37%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine MotoMotion China's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. MotoMotion China 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, MotoMotion China actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case MotoMotion China has CN¥2.09b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥512m, being 108% of its EBIT. The bottom line is that we do not find MotoMotion China's debt levels at all concerning. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of MotoMotion China's earnings per share history for free.

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.