Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Lifan Technology(Group)Co.,Ltd. (SHSE:601777) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Lifan Technology(Group)Co.Ltd Carry?
As you can see below, Lifan Technology(Group)Co.Ltd had CN¥2.80b of debt at September 2023, down from CN¥3.03b a year prior. But on the other hand it also has CN¥3.15b in cash, leading to a CN¥354.2m net cash position.
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¥9.17b falling due within a year, and liabilities of CN¥2.78b due beyond that. Offsetting these obligations, it had cash of CN¥3.15b as well as receivables valued at CN¥4.30b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥4.49b.
This deficit isn't so bad because Lifan Technology(Group)Co.Ltd is worth CN¥14.4b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Lifan Technology(Group)Co.Ltd's earnings that will influence how the balance sheet holds up in the future. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to CN¥7.7b. We usually like to see faster growth from unprofitable companies, but each to their own.
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¥64m. 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. 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. For instance, we've identified 1 warning sign for Lifan Technology(Group)Co.Ltd that you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.