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.' 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 is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Zhejiang Qianjiang Motorcycle Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Zhejiang Qianjiang Motorcycle had CN¥308.1m of debt, an increase on CN¥25.6m, over one year. However, its balance sheet shows it holds CN¥5.86b in cash, so it actually has CN¥5.55b net cash.

A Look At Zhejiang Qianjiang Motorcycle's Liabilities

Zooming in on the latest balance sheet data, we can see that Zhejiang Qianjiang Motorcycle had liabilities of CN¥3.73b due within 12 months and liabilities of CN¥1.61b due beyond that. Offsetting these obligations, it had cash of CN¥5.86b as well as receivables valued at CN¥668.1m due within 12 months. So it can boast CN¥1.19b more liquid assets than total liabilities.

This surplus suggests that Zhejiang Qianjiang Motorcycle has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Zhejiang Qianjiang Motorcycle boasts net cash, so it's fair to say it does not have a heavy debt load!

While Zhejiang Qianjiang Motorcycle doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, Zhejiang Qianjiang Motorcycle 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 Zhejiang Qianjiang Motorcycle has CN¥5.55b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥740m, being 148% of its EBIT. So we don't think Zhejiang Qianjiang Motorcycle's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign 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.