Does Bethel Automotive Safety Systems (SHSE:603596) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Bethel Automotive Safety Systems Co., Ltd (SHSE:603596) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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.

See our latest analysis for Bethel Automotive Safety Systems

What Is Bethel Automotive Safety Systems's Net Debt?

The image below, which you can click on for greater detail, shows that Bethel Automotive Safety Systems had debt of CN¥409.9m at the end of June 2024, a reduction from CN¥755.5m over a year. But it also has CN¥2.57b in cash to offset that, meaning it has CN¥2.16b net cash.

How Strong Is Bethel Automotive Safety Systems' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bethel Automotive Safety Systems had liabilities of CN¥3.92b due within 12 months and liabilities of CN¥494.9m due beyond that. Offsetting these obligations, it had cash of CN¥2.57b as well as receivables valued at CN¥3.73b due within 12 months. So it can boast CN¥1.88b more liquid assets than total liabilities.

This short term liquidity is a sign that Bethel Automotive Safety Systems could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Bethel Automotive Safety Systems has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Bethel Automotive Safety Systems has boosted its EBIT by 31%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Bethel Automotive Safety Systems's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Bethel Automotive Safety 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, Bethel Automotive Safety Systems reported free cash flow worth 7.4% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Bethel Automotive Safety Systems has net cash of CN¥2.16b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 31% over the last year. So we don't think Bethel Automotive Safety Systems's use of debt is 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 example Bethel Automotive Safety Systems has 2 warning signs (and 1 which is a bit concerning) we think 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.