Is Songz Automobile Air Conditioning (SZSE:002454) A Risky Investment?

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.' 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 can see that Songz Automobile Air Conditioning Co., Ltd (SZSE:002454) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Songz Automobile Air Conditioning

What Is Songz Automobile Air Conditioning's Debt?

The chart below, which you can click on for greater detail, shows that Songz Automobile Air Conditioning had CN¥30.0m in debt in September 2024; about the same as the year before. However, it does have CN¥2.00b in cash offsetting this, leading to net cash of CN¥1.97b.

How Healthy Is Songz Automobile Air Conditioning's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Songz Automobile Air Conditioning had liabilities of CN¥2.90b due within 12 months and liabilities of CN¥184.6m due beyond that. Offsetting this, it had CN¥2.00b in cash and CN¥2.41b in receivables that were due within 12 months. So it can boast CN¥1.32b more liquid assets than total liabilities.

This luscious liquidity implies that Songz Automobile Air Conditioning's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Songz Automobile Air Conditioning has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Songz Automobile Air Conditioning grew its EBIT by 13% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Songz Automobile Air Conditioning can strengthen its balance sheet over time. 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. Songz Automobile Air Conditioning 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 most recent three years, Songz Automobile Air Conditioning recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Songz Automobile Air Conditioning has CN¥1.97b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥148m, being 77% of its EBIT. So is Songz Automobile Air Conditioning's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign for Songz Automobile Air Conditioning you should be aware of.

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.