Ningbo Shuanglin Auto PartsLtd (SZSE:300100) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Ningbo Shuanglin Auto Parts Co.,Ltd. (SZSE:300100) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Ningbo Shuanglin Auto PartsLtd

How Much Debt Does Ningbo Shuanglin Auto PartsLtd Carry?

As you can see below, Ningbo Shuanglin Auto PartsLtd had CN¥960.8m of debt at June 2024, down from CN¥1.32b a year prior. However, because it has a cash reserve of CN¥575.9m, its net debt is less, at about CN¥385.0m.

How Healthy Is Ningbo Shuanglin Auto PartsLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ningbo Shuanglin Auto PartsLtd had liabilities of CN¥2.75b due within 12 months and liabilities of CN¥383.7m due beyond that. Offsetting this, it had CN¥575.9m in cash and CN¥1.62b in receivables that were due within 12 months. So its liabilities total CN¥940.4m 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¥7.29b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). 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 0.60. But the really cool thing is that it actually managed to receive more interest than it paid, over the last year. So there's no doubt this company can take on debt while staying cool as a cucumber. In addition to that, we're happy to report that Ningbo Shuanglin Auto PartsLtd has boosted its EBIT by 68%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Ningbo Shuanglin Auto PartsLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Happily for any shareholders, Ningbo Shuanglin Auto PartsLtd actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

Ningbo Shuanglin Auto PartsLtd's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! Overall, we don't think Ningbo Shuanglin Auto PartsLtd is taking any bad risks, as its debt load seems modest. So the balance sheet looks pretty healthy, 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. We've identified 1 warning sign with Ningbo Shuanglin Auto PartsLtd , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.