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.' 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 Xiamen King Long Motor Group Co., Ltd. (SHSE:600686) makes use of debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Xiamen King Long Motor Group's Net Debt?

As you can see below, Xiamen King Long Motor Group had CN¥5.69b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥8.32b in cash offsetting this, leading to net cash of CN¥2.64b.

A Look At Xiamen King Long Motor Group's Liabilities

According to the last reported balance sheet, Xiamen King Long Motor Group had liabilities of CN¥17.8b due within 12 months, and liabilities of CN¥5.88b due beyond 12 months. Offsetting these obligations, it had cash of CN¥8.32b as well as receivables valued at CN¥5.65b due within 12 months. So its liabilities total CN¥9.66b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's CN¥9.44b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Given that Xiamen King Long Motor Group has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. There's no doubt that we learn most about debt from the balance sheet. But it is Xiamen King Long Motor Group'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.

Over 12 months, Xiamen King Long Motor Group made a loss at the EBIT level, and saw its revenue drop to CN¥20b, which is a fall of 9.5%. We would much prefer see growth.

So How Risky Is Xiamen King Long Motor Group?

While Xiamen King Long Motor Group lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥95m. 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. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. 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. For example, we've discovered 3 warning signs for Xiamen King Long Motor Group (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.