Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Lifan Technology(Group)Co.,Ltd. (SHSE:601777) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Lifan Technology(Group)Co.Ltd Carry?

As you can see below, at the end of March 2024, Lifan Technology(Group)Co.Ltd had CN¥2.56b of debt, up from CN¥2.17b a year ago. Click the image for more detail. But it also has CN¥3.32b in cash to offset that, meaning it has CN¥763.9m net cash.

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¥7.58b falling due within a year, and liabilities of CN¥2.17b due beyond that. Offsetting these obligations, it had cash of CN¥3.32b as well as receivables valued at CN¥1.80b due within 12 months. So it has liabilities totalling CN¥4.63b more than its cash and near-term receivables, combined.

Lifan Technology(Group)Co.Ltd has a market capitalization of CN¥17.7b, 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. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Lifan Technology(Group)Co.Ltd will need earnings to service that debt. 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 had a loss before interest and tax, and actually shrunk its revenue by 17%, to CN¥7.1b. That's not what we would hope to see.

So How Risky Is Lifan Technology(Group)Co.Ltd?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Lifan Technology(Group)Co.Ltd lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥790m of cash and made a loss of CN¥1.0m. With only CN¥763.9m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Lifan Technology(Group)Co.Ltd you should be aware of.

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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