Is Bethel Automotive Safety Systems (SHSE:603596) Using Too Much 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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Bethel Automotive Safety Systems Co., Ltd (SHSE:603596) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Bethel Automotive Safety Systems

What Is Bethel Automotive Safety Systems's Debt?

You can click the graphic below for the historical numbers, but it shows that Bethel Automotive Safety Systems had CN¥517.6m of debt in March 2024, down from CN¥738.5m, one year before. However, it does have CN¥2.37b in cash offsetting this, leading to net cash of CN¥1.85b.

How Healthy 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¥4.16b due within 12 months and liabilities of CN¥495.1m due beyond that. Offsetting this, it had CN¥2.37b in cash and CN¥4.14b in receivables that were due within 12 months. So it actually has CN¥1.86b 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. Succinctly put, Bethel Automotive Safety Systems boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Bethel Automotive Safety Systems has boosted its EBIT by 43%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Considering the last three years, Bethel Automotive Safety Systems actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Bethel Automotive Safety Systems has CN¥1.85b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 43% over the last year. 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that Bethel Automotive Safety Systems is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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.