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.' 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 note that Sinotruk Jinan Truck Co., Ltd. (SZSE:000951) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Sinotruk Jinan Truck

What Is Sinotruk Jinan Truck's Debt?

You can click the graphic below for the historical numbers, but it shows that Sinotruk Jinan Truck had CN¥1.00b of debt in March 2022, down from CN¥1.70b, one year before. However, its balance sheet shows it holds CN¥9.85b in cash, so it actually has CN¥8.85b net cash.

How Strong Is Sinotruk Jinan Truck's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sinotruk Jinan Truck had liabilities of CN¥21.4b due within 12 months and liabilities of CN¥390.2m due beyond that. Offsetting these obligations, it had cash of CN¥9.85b as well as receivables valued at CN¥14.2b due within 12 months. So it can boast CN¥2.32b more liquid assets than total liabilities.

It's good to see that Sinotruk Jinan Truck has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Sinotruk Jinan Truck boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Sinotruk Jinan Truck if management cannot prevent a repeat of the 72% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Sinotruk Jinan Truck 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Sinotruk Jinan Truck may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Sinotruk Jinan Truck actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sinotruk Jinan Truck has net cash of CN¥8.85b, as well as more liquid assets than liabilities. The cherry on top was that in converted 138% of that EBIT to free cash flow, bringing in CN¥4.3b. So is Sinotruk Jinan Truck's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Sinotruk Jinan Truck 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.