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.' 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. As with many other companies Jiangling Motors Corporation, Ltd. (SZSE:000550) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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 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.
View our latest analysis for Jiangling Motors Corporation
What Is Jiangling Motors Corporation's Net Debt?
As you can see below, Jiangling Motors Corporation had CN¥1.39b of debt at September 2023, down from CN¥1.87b a year prior. However, its balance sheet shows it holds CN¥10.2b in cash, so it actually has CN¥8.83b net cash.
How Healthy Is Jiangling Motors Corporation's Balance Sheet?
According to the last reported balance sheet, Jiangling Motors Corporation had liabilities of CN¥17.7b due within 12 months, and liabilities of CN¥654.1m due beyond 12 months. Offsetting these obligations, it had cash of CN¥10.2b as well as receivables valued at CN¥5.03b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.15b.
Jiangling Motors Corporation has a market capitalization of CN¥12.5b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Jiangling Motors Corporation boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Jiangling Motors Corporation'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.
In the last year Jiangling Motors Corporation's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.
So How Risky Is Jiangling Motors Corporation?
While Jiangling Motors Corporation lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥1.2b. 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Jiangling Motors Corporation , and understanding them should be part of your investment process.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.
