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

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. We note that Bethel Automotive Safety Systems Co., Ltd (SHSE:603596) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 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¥198.8m at the end of September 2024, a reduction from CN¥882.7m over a year. However, it does have CN¥2.35b in cash offsetting this, leading to net cash of CN¥2.15b.

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¥4.27b due within 12 months and liabilities of CN¥497.5m due beyond that. Offsetting these obligations, it had cash of CN¥2.35b as well as receivables valued at CN¥4.27b due within 12 months. So it can boast CN¥1.85b 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.

Also positive, Bethel Automotive Safety Systems grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 barely recorded positive free cash flow, in total. While many companies do operate at break-even, we prefer see substantial free cash flow, especially if a it already has dead.

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¥2.15b, as well as more liquid assets than liabilities. And we liked the look of last year's 29% year-on-year EBIT growth. So is Bethel Automotive Safety 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Bethel Automotive Safety Systems is showing 1 warning sign in our investment analysis , you should know about...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.