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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Bohai Automotive Systems CO., LTD. (SHSE:600960) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Bohai Automotive Systems's Debt?

As you can see below, at the end of September 2024, Bohai Automotive Systems had CN¥1.85b of debt, up from CN¥1.67b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥923.5m, its net debt is less, at about CN¥928.5m.

How Strong Is Bohai Automotive Systems' Balance Sheet?

According to the last reported balance sheet, Bohai Automotive Systems had liabilities of CN¥2.88b due within 12 months, and liabilities of CN¥533.5m due beyond 12 months. On the other hand, it had cash of CN¥923.5m and CN¥1.36b worth of receivables due within a year. So its liabilities total CN¥1.12b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Bohai Automotive Systems is worth CN¥3.89b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Bohai Automotive Systems's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Bohai Automotive Systems made a loss at the EBIT level, and saw its revenue drop to CN¥4.5b, which is a fall of 2.9%. That's not what we would hope to see.

Caveat Emptor

Importantly, Bohai Automotive Systems had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥224m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥162m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Bohai Automotive Systems that 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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