Does Shinelong Automotive Lightweight Application (HKG:1930) Have A Healthy 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. We note that Shinelong Automotive Lightweight Application Limited (HKG:1930) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Shinelong Automotive Lightweight Application

How Much Debt Does Shinelong Automotive Lightweight Application Carry?

As you can see below, at the end of December 2023, Shinelong Automotive Lightweight Application had CN¥19.6m of debt, up from CN¥12.9m a year ago. Click the image for more detail. But on the other hand it also has CN¥43.5m in cash, leading to a CN¥24.0m net cash position.

A Look At Shinelong Automotive Lightweight Application's Liabilities

Zooming in on the latest balance sheet data, we can see that Shinelong Automotive Lightweight Application had liabilities of CN¥260.0m due within 12 months and liabilities of CN¥16.9m due beyond that. Offsetting this, it had CN¥43.5m in cash and CN¥102.9m in receivables that were due within 12 months. So its liabilities total CN¥130.4m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CN¥159.1m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Shinelong Automotive Lightweight Application also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Shinelong Automotive Lightweight Application grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Shinelong Automotive Lightweight Application will need earnings to service that debt. 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 company can only pay off debt with cold hard cash, not accounting profits. Shinelong Automotive Lightweight Application 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. Over the last three years, Shinelong Automotive Lightweight Application saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

Although Shinelong Automotive Lightweight Application's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥24.0m. And it impressed us with its EBIT growth of 21% over the last year. So while Shinelong Automotive Lightweight Application does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Shinelong Automotive Lightweight Application (including 1 which can't be ignored) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.