Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Shenyang Jinbei Automotive Company Limited (SHSE:600609) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Shenyang Jinbei Automotive's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Shenyang Jinbei Automotive had CN¥690.3m of debt in September 2023, down from CN¥896.5m, one year before. But it also has CN¥1.64b in cash to offset that, meaning it has CN¥947.2m net cash.

A Look At Shenyang Jinbei Automotive's Liabilities

We can see from the most recent balance sheet that Shenyang Jinbei Automotive had liabilities of CN¥2.78b falling due within a year, and liabilities of CN¥333.3m due beyond that. Offsetting these obligations, it had cash of CN¥1.64b as well as receivables valued at CN¥927.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥552.0m.

Since publicly traded Shenyang Jinbei Automotive shares are worth a total of CN¥5.90b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Shenyang Jinbei Automotive boasts net cash, so it's fair to say it does not have a heavy debt load!

Shenyang Jinbei Automotive's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shenyang Jinbei Automotive 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. Shenyang Jinbei Automotive 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. During the last three years, Shenyang Jinbei Automotive generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about Shenyang Jinbei Automotive's liabilities, but we can be reassured by the fact it has has net cash of CN¥947.2m. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in CN¥1.1b. So is Shenyang Jinbei Automotive's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Shenyang Jinbei Automotive, you may well want to click here to check an interactive graph of its earnings per share history.

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.