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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Jiangsu Leili Motor Co., Ltd (SZSE:300660) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Jiangsu Leili Motor

How Much Debt Does Jiangsu Leili Motor Carry?

As you can see below, Jiangsu Leili Motor had CN¥269.7m of debt at September 2023, down from CN¥490.0m a year prior. But it also has CN¥1.79b in cash to offset that, meaning it has CN¥1.52b net cash.

How Strong Is Jiangsu Leili Motor's Balance Sheet?

According to the last reported balance sheet, Jiangsu Leili Motor had liabilities of CN¥1.73b due within 12 months, and liabilities of CN¥41.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.79b as well as receivables valued at CN¥1.37b due within 12 months. So it actually has CN¥1.39b more liquid assets than total liabilities.

This excess liquidity suggests that Jiangsu Leili Motor is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Jiangsu Leili Motor has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Jiangsu Leili Motor has increased its EBIT by 2.2% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jiangsu Leili Motor's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Jiangsu Leili Motor 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. In the last three years, Jiangsu Leili Motor created free cash flow amounting to 4.8% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jiangsu Leili Motor has CN¥1.52b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 2.2% over the last year. So we don't have any problem with Jiangsu Leili Motor's use of debt. 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 - Jiangsu Leili Motor has 1 warning sign we think you should be aware of.

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.