Would Ningbo Shenglong Automotive Powertrain SystemLtd (SHSE:603178) Be Better Off With Less Debt?

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, Ningbo Shenglong Automotive Powertrain System Co.,Ltd. (SHSE:603178) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Ningbo Shenglong Automotive Powertrain SystemLtd

What Is Ningbo Shenglong Automotive Powertrain SystemLtd's Debt?

As you can see below, at the end of September 2024, Ningbo Shenglong Automotive Powertrain SystemLtd had CN¥356.2m of debt, up from CN¥228.3m a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥295.3m, its net debt is less, at about CN¥60.9m.

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

We can see from the most recent balance sheet that Ningbo Shenglong Automotive Powertrain SystemLtd had liabilities of CN¥888.8m falling due within a year, and liabilities of CN¥163.4m due beyond that. Offsetting this, it had CN¥295.3m in cash and CN¥414.1m in receivables that were due within 12 months. So its liabilities total CN¥342.8m more than the combination of its cash and short-term receivables.

Given Ningbo Shenglong Automotive Powertrain SystemLtd has a market capitalization of CN¥4.80b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, Ningbo Shenglong Automotive Powertrain SystemLtd has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But it is Ningbo Shenglong Automotive Powertrain SystemLtd'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.

In the last year Ningbo Shenglong Automotive Powertrain SystemLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 6.1%, 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¥88m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Ningbo Shenglong Automotive Powertrain SystemLtd that 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.