Beijing WKW Automotive PartsLtd (SZSE:002662) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Beijing WKW Automotive Parts Co.,Ltd. (SZSE:002662) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Beijing WKW Automotive PartsLtd

What Is Beijing WKW Automotive PartsLtd's Net Debt?

As you can see below, Beijing WKW Automotive PartsLtd had CN¥255.2m of debt at June 2024, down from CN¥450.4m a year prior. However, it does have CN¥437.8m in cash offsetting this, leading to net cash of CN¥182.6m.

How Strong Is Beijing WKW Automotive PartsLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Beijing WKW Automotive PartsLtd had liabilities of CN¥703.7m due within 12 months and liabilities of CN¥36.5m due beyond that. Offsetting this, it had CN¥437.8m in cash and CN¥898.3m in receivables that were due within 12 months. So it can boast CN¥595.9m more liquid assets than total liabilities.

This surplus suggests that Beijing WKW Automotive PartsLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Beijing WKW Automotive PartsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Beijing WKW Automotive PartsLtd grew its EBIT by 9.1% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Beijing WKW Automotive PartsLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Beijing WKW Automotive PartsLtd 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. During the last three years, Beijing WKW Automotive PartsLtd produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Beijing WKW Automotive PartsLtd has CN¥182.6m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 9.1% over the last year. So we don't think Beijing WKW Automotive PartsLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Beijing WKW Automotive PartsLtd that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.