We Think YAPP Automotive Systems (SHSE:603013) Can Manage Its Debt With Ease

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.' 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 YAPP Automotive Systems Co., Ltd. (SHSE:603013) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

See our latest analysis for YAPP Automotive Systems

What Is YAPP Automotive Systems's Net Debt?

As you can see below, YAPP Automotive Systems had CN¥47.6m of debt at September 2024, down from CN¥77.8m a year prior. But on the other hand it also has CN¥2.10b in cash, leading to a CN¥2.05b net cash position.

How Healthy Is YAPP Automotive Systems' Balance Sheet?

According to the last reported balance sheet, YAPP Automotive Systems had liabilities of CN¥2.14b due within 12 months, and liabilities of CN¥300.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.10b as well as receivables valued at CN¥1.54b due within 12 months. So it can boast CN¥1.20b 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.

While YAPP Automotive Systems doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But it is YAPP 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While YAPP Automotive 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. 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 it is always sensible to investigate a company's debt, in this case YAPP Automotive Systems has CN¥2.05b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 123% of that EBIT to free cash flow, bringing in CN¥704m. So is YAPP Automotive Systems's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for YAPP Automotive Systems you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.