FAWER Automotive Parts Limited (SZSE:000030) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that FAWER Automotive Parts Limited Company (SZSE:000030) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for FAWER Automotive Parts Limited

What Is FAWER Automotive Parts Limited's Net Debt?

As you can see below, FAWER Automotive Parts Limited had CN¥871.4m of debt at September 2024, down from CN¥925.5m a year prior. But it also has CN¥1.34b in cash to offset that, meaning it has CN¥467.2m net cash.

How Healthy Is FAWER Automotive Parts Limited's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that FAWER Automotive Parts Limited had liabilities of CN¥6.55b due within 12 months and liabilities of CN¥1.34b due beyond that. Offsetting these obligations, it had cash of CN¥1.34b as well as receivables valued at CN¥5.30b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.26b.

Since publicly traded FAWER Automotive Parts Limited shares are worth a total of CN¥8.80b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, FAWER Automotive Parts Limited boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, FAWER Automotive Parts Limited turned things around in the last 12 months, delivering and EBIT of CN¥218m. When analysing debt levels, the balance sheet is the obvious place to start. But it is FAWER Automotive Parts Limited's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. FAWER Automotive Parts Limited 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 year, FAWER Automotive Parts Limited saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

Although FAWER Automotive Parts Limited's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥467.2m. So we are not troubled with FAWER Automotive Parts Limited's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that FAWER Automotive Parts Limited is showing 3 warning signs in our investment analysis , and 1 of those is potentially serious...

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.