Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Zhejiang Qianjiang Motorcycle Co., Ltd. (SZSE:000913) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Zhejiang Qianjiang Motorcycle Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Zhejiang Qianjiang Motorcycle had debt of CN¥209.1m, up from CN¥17.8m in one year. But on the other hand it also has CN¥5.41b in cash, leading to a CN¥5.20b net cash position.

How Strong Is Zhejiang Qianjiang Motorcycle's Balance Sheet?

According to the last reported balance sheet, Zhejiang Qianjiang Motorcycle had liabilities of CN¥3.22b due within 12 months, and liabilities of CN¥1.51b due beyond 12 months. On the other hand, it had cash of CN¥5.41b and CN¥622.0m worth of receivables due within a year. So it can boast CN¥1.30b more liquid assets than total liabilities.

This excess liquidity suggests that Zhejiang Qianjiang Motorcycle is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Zhejiang Qianjiang Motorcycle boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Zhejiang Qianjiang Motorcycle's EBIT dived 17%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Zhejiang Qianjiang Motorcycle 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Zhejiang Qianjiang Motorcycle has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Zhejiang Qianjiang Motorcycle generated free cash flow amounting to a very robust 90% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Qianjiang Motorcycle has net cash of CN¥5.20b, as well as more liquid assets than liabilities. The cherry on top was that in converted 90% of that EBIT to free cash flow, bringing in CN¥308m. So we don't think Zhejiang Qianjiang Motorcycle's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Zhejiang Qianjiang Motorcycle .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com