Does YAPP Automotive Systems (SHSE:603013) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, YAPP Automotive Systems Co., Ltd. (SHSE:603013) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for YAPP Automotive Systems

What Is YAPP Automotive Systems's Debt?

The image below, which you can click on for greater detail, shows that YAPP Automotive Systems had debt of CN¥77.8m at the end of September 2023, a reduction from CN¥181.5m over a year. But on the other hand it also has CN¥1.67b in cash, leading to a CN¥1.60b net cash position.

A Look At YAPP Automotive Systems' Liabilities

According to the last reported balance sheet, YAPP Automotive Systems had liabilities of CN¥2.24b due within 12 months, and liabilities of CN¥242.0m due beyond 12 months. Offsetting this, it had CN¥1.67b in cash and CN¥1.79b in receivables that were due within 12 months. So it can boast CN¥985.0m more liquid assets than total liabilities.

This surplus suggests that YAPP Automotive Systems has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that YAPP Automotive Systems has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, YAPP Automotive Systems grew its EBIT by 33% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since YAPP Automotive Systems will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. YAPP Automotive Systems 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. Over the last three years, YAPP Automotive Systems 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 we empathize with investors who find debt concerning, you should keep in mind that YAPP Automotive Systems has net cash of CN¥1.60b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥760m, being 117% of its EBIT. So is YAPP Automotive Systems's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - YAPP Automotive Systems 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.