Warren Buffett famously said, '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. Importantly, Shenyang Jinbei Automotive Company Limited (SHSE:600609) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Shenyang Jinbei Automotive's Net Debt?

The image below, which you can click on for greater detail, shows that Shenyang Jinbei Automotive had debt of CN¥481.3m at the end of March 2024, a reduction from CN¥755.8m over a year. But on the other hand it also has CN¥1.80b in cash, leading to a CN¥1.32b net cash position.

How Strong Is Shenyang Jinbei Automotive's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenyang Jinbei Automotive had liabilities of CN¥2.22b due within 12 months and liabilities of CN¥155.9m due beyond that. Offsetting these obligations, it had cash of CN¥1.80b as well as receivables valued at CN¥279.3m due within 12 months. So its liabilities total CN¥299.5m more than the combination of its cash and short-term receivables.

Given Shenyang Jinbei Automotive has a market capitalization of CN¥5.34b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Shenyang Jinbei Automotive also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Shenyang Jinbei Automotive's load is not too heavy, because its EBIT was down 30% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shenyang Jinbei Automotive 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Shenyang Jinbei Automotive 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. Happily for any shareholders, Shenyang Jinbei Automotive 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

We could understand if investors are concerned about Shenyang Jinbei Automotive's liabilities, but we can be reassured by the fact it has has net cash of CN¥1.32b. The cherry on top was that in converted 136% of that EBIT to free cash flow, bringing in CN¥1.0b. So we are not troubled with Shenyang Jinbei Automotive's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Shenyang Jinbei Automotive's earnings per share history for free.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com