Shenyang Jinbei Automotive (SHSE:600609) Has A Pretty Healthy Balance Sheet

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.' 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. We can see that Shenyang Jinbei Automotive Company Limited (SHSE:600609) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Shenyang Jinbei Automotive

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?

According to the last reported balance sheet, Shenyang Jinbei Automotive had liabilities of CN¥2.22b due within 12 months, and liabilities of CN¥155.9m due beyond 12 months. Offsetting this, it had CN¥1.80b in cash and CN¥279.3m in receivables that were 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. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

The modesty of its debt load may become crucial for Shenyang Jinbei Automotive if management cannot prevent a repeat of the 30% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shenyang Jinbei Automotive's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the last three years, Shenyang Jinbei Automotive actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Shenyang Jinbei Automotive has CN¥1.32b in net cash. The cherry on top was that in converted 136% of that EBIT to free cash flow, bringing in CN¥1.0b. So we don't have any problem with Shenyang Jinbei Automotive's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Shenyang Jinbei Automotive, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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