Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Bethel Automotive Safety Systems Co., Ltd (SHSE:603596) does carry debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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.

What Is Bethel Automotive Safety Systems's Debt?

You can click the graphic below for the historical numbers, but it shows that Bethel Automotive Safety Systems had CN¥198.8m of debt in September 2024, down from CN¥882.7m, one year before. But on the other hand it also has CN¥2.35b in cash, leading to a CN¥2.15b net cash position.

How Healthy Is Bethel Automotive Safety Systems' Balance Sheet?

We can see from the most recent balance sheet that Bethel Automotive Safety Systems had liabilities of CN¥4.27b falling due within a year, and liabilities of CN¥497.5m due beyond that. On the other hand, it had cash of CN¥2.35b and CN¥4.27b worth of receivables due within a year. So it can boast CN¥1.85b more liquid assets than total liabilities.

This surplus suggests that Bethel Automotive Safety Systems has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Bethel Automotive Safety Systems boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Bethel Automotive Safety Systems grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Bethel Automotive Safety Systems's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Bethel Automotive Safety Systems 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. In the last three years, Bethel Automotive Safety Systems basically broke even on a free cash flow basis. Some might say that's a concern, when it comes considering how easily it would be for it to down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Bethel Automotive Safety Systems has net cash of CN¥2.15b, as well as more liquid assets than liabilities. And we liked the look of last year's 29% year-on-year EBIT growth. So we don't think Bethel Automotive Safety Systems's use of debt is risky. 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. We've identified 2 warning signs with Bethel Automotive Safety Systems (at least 1 which is concerning) , and understanding them should be part of your investment process.

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.