These 4 Measures Indicate That Shanghai Automobile Air-Conditioner Accessories (SHSE:603107) Is Using Debt Reasonably Well

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Shanghai Automobile Air-Conditioner Accessories Co., Ltd. (SHSE:603107) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shanghai Automobile Air-Conditioner Accessories

How Much Debt Does Shanghai Automobile Air-Conditioner Accessories Carry?

As you can see below, Shanghai Automobile Air-Conditioner Accessories had CN¥150.6m of debt at September 2024, down from CN¥323.4m a year prior. However, it does have CN¥833.7m in cash offsetting this, leading to net cash of CN¥683.1m.

How Healthy Is Shanghai Automobile Air-Conditioner Accessories' Balance Sheet?

The latest balance sheet data shows that Shanghai Automobile Air-Conditioner Accessories had liabilities of CN¥518.6m due within a year, and liabilities of CN¥149.8m falling due after that. Offsetting these obligations, it had cash of CN¥833.7m as well as receivables valued at CN¥641.4m due within 12 months. So it actually has CN¥806.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Shanghai Automobile Air-Conditioner Accessories could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shanghai Automobile Air-Conditioner Accessories boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Shanghai Automobile Air-Conditioner Accessories saw its EBIT decline by 2.7% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Shanghai Automobile Air-Conditioner Accessories will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Shanghai Automobile Air-Conditioner Accessories 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, Shanghai Automobile Air-Conditioner Accessories saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shanghai Automobile Air-Conditioner Accessories has CN¥683.1m in net cash and a decent-looking balance sheet. So we don't have any problem with Shanghai Automobile Air-Conditioner Accessories's use of debt. 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. For instance, we've identified 2 warning signs for Shanghai Automobile Air-Conditioner Accessories (1 can't be ignored) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.