Does Ningbo Shuanglin Auto PartsLtd (SZSE:300100) Have A 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. As with many other companies Ningbo Shuanglin Auto Parts Co.,Ltd. (SZSE:300100) makes use of debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Ningbo Shuanglin Auto PartsLtd's Debt?

The image below, which you can click on for greater detail, shows that Ningbo Shuanglin Auto PartsLtd had debt of CN¥795.1m at the end of September 2024, a reduction from CN¥1.27b over a year. However, it does have CN¥410.5m in cash offsetting this, leading to net debt of about CN¥384.6m.

A Look At Ningbo Shuanglin Auto PartsLtd's Liabilities

According to the last reported balance sheet, Ningbo Shuanglin Auto PartsLtd had liabilities of CN¥2.59b due within 12 months, and liabilities of CN¥383.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥410.5m as well as receivables valued at CN¥1.65b due within 12 months. So its liabilities total CN¥911.7m more than the combination of its cash and short-term receivables.

Since publicly traded Ningbo Shuanglin Auto PartsLtd shares are worth a total of CN¥26.1b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, Ningbo Shuanglin Auto PartsLtd has a very light debt load indeed.

View our latest analysis for Ningbo Shuanglin Auto PartsLtd

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Ningbo Shuanglin Auto PartsLtd has a low debt to EBITDA ratio of only 0.54. And remarkably, despite having net debt, it actually received more in interest over the last twelve months than it had to pay. So it's fair to say it can handle debt like a hotshot teppanyaki chef handles cooking. In addition to that, we're happy to report that Ningbo Shuanglin Auto PartsLtd has boosted its EBIT by 67%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ningbo Shuanglin Auto PartsLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Ningbo Shuanglin Auto PartsLtd recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Our View

Happily, Ningbo Shuanglin Auto PartsLtd's impressive interest cover implies it has the upper hand on its debt. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. It looks Ningbo Shuanglin Auto PartsLtd has no trouble standing on its own two feet, and it has no reason to fear its lenders. For investing nerds like us its balance sheet is almost charming. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Ningbo Shuanglin Auto PartsLtd that you should be aware of.

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.

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.