Ningbo Shenglong Automotive Powertrain SystemLtd (SHSE:603178) Is Making Moderate Use Of Debt

Warren Buffett famously said, '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. As with many other companies Ningbo Shenglong Automotive Powertrain System Co.,Ltd. (SHSE:603178) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Ningbo Shenglong Automotive Powertrain SystemLtd

What Is Ningbo Shenglong Automotive Powertrain SystemLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Ningbo Shenglong Automotive Powertrain SystemLtd had debt of CN¥364.9m, up from CN¥163.8m in one year. On the flip side, it has CN¥278.8m in cash leading to net debt of about CN¥86.1m.

How Strong Is Ningbo Shenglong Automotive Powertrain SystemLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ningbo Shenglong Automotive Powertrain SystemLtd had liabilities of CN¥839.7m due within 12 months and liabilities of CN¥148.9m due beyond that. Offsetting this, it had CN¥278.8m in cash and CN¥376.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥333.0m.

Given Ningbo Shenglong Automotive Powertrain SystemLtd has a market capitalization of CN¥4.99b, 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Ningbo Shenglong Automotive Powertrain SystemLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Ningbo Shenglong Automotive Powertrain SystemLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 3.5%, to CN¥1.5b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Ningbo Shenglong Automotive Powertrain SystemLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥18m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥11m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. We've identified 2 warning signs with Ningbo Shenglong Automotive Powertrain SystemLtd , 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.

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