Is Beijing WKW Automotive PartsLtd (SZSE:002662) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Beijing WKW Automotive Parts Co.,Ltd. (SZSE:002662) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Beijing WKW Automotive PartsLtd

How Much Debt Does Beijing WKW Automotive PartsLtd Carry?

As you can see below, Beijing WKW Automotive PartsLtd had CN¥335.3m of debt at March 2024, down from CN¥350.3m a year prior. However, it does have CN¥513.0m in cash offsetting this, leading to net cash of CN¥177.6m.

How Healthy 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¥907.4m due within 12 months and liabilities of CN¥38.0m due beyond that. Offsetting these obligations, it had cash of CN¥513.0m as well as receivables valued at CN¥1.00b due within 12 months. So it actually has CN¥570.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Beijing WKW Automotive PartsLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Beijing WKW Automotive PartsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Beijing WKW Automotive PartsLtd has been able to increase its EBIT by 22% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Beijing WKW Automotive PartsLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Looking at the most recent three years, Beijing WKW Automotive PartsLtd recorded free cash flow of 46% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Beijing WKW Automotive PartsLtd has net cash of CN¥177.6m, as well as more liquid assets than liabilities. And we liked the look of last year's 22% year-on-year EBIT growth. So we don't think Beijing WKW Automotive PartsLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Beijing WKW Automotive PartsLtd has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.