Is Qingdao Sentury Tire (SZSE:002984) A Risky Investment?

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 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. Importantly, Qingdao Sentury Tire Co., Ltd. (SZSE:002984) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Qingdao Sentury Tire

How Much Debt Does Qingdao Sentury Tire Carry?

The chart below, which you can click on for greater detail, shows that Qingdao Sentury Tire had CN¥1.98b in debt in March 2024; about the same as the year before. However, it does have CN¥3.66b in cash offsetting this, leading to net cash of CN¥1.69b.

How Strong Is Qingdao Sentury Tire's Balance Sheet?

According to the last reported balance sheet, Qingdao Sentury Tire had liabilities of CN¥1.71b due within 12 months, and liabilities of CN¥2.12b due beyond 12 months. Offsetting these obligations, it had cash of CN¥3.66b as well as receivables valued at CN¥1.26b due within 12 months. So it can boast CN¥1.10b more liquid assets than total liabilities.

This surplus suggests that Qingdao Sentury Tire has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Qingdao Sentury Tire has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Qingdao Sentury Tire grew its EBIT by 102% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Qingdao Sentury Tire 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 company can only pay off debt with cold hard cash, not accounting profits. Qingdao Sentury Tire 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. In the last three years, Qingdao Sentury Tire created free cash flow amounting to 18% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Qingdao Sentury Tire has net cash of CN¥1.69b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 102% over the last year. So is Qingdao Sentury Tire'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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Qingdao Sentury Tire has 2 warning signs 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.

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.