Is SAIC Motor (SHSE:600104) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that SAIC Motor Corporation Limited (SHSE:600104) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

Check out our latest analysis for SAIC Motor

What Is SAIC Motor's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 SAIC Motor had debt of CN¥190.5b, up from CN¥171.4b in one year. But on the other hand it also has CN¥191.9b in cash, leading to a CN¥1.42b net cash position.

How Healthy Is SAIC Motor's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SAIC Motor had liabilities of CN¥495.4b due within 12 months and liabilities of CN¥115.3b due beyond that. On the other hand, it had cash of CN¥191.9b and CN¥102.4b worth of receivables due within a year. So it has liabilities totalling CN¥316.4b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥159.0b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, SAIC Motor would probably need a major re-capitalization if its creditors were to demand repayment. SAIC Motor boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Even more impressive was the fact that SAIC Motor grew its EBIT by 195% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine SAIC Motor's ability to maintain a healthy balance sheet going forward. 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. SAIC Motor 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. Looking at the most recent three years, SAIC Motor recorded free cash flow of 23% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

Although SAIC Motor'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¥1.42b. And we liked the look of last year's 195% year-on-year EBIT growth. So although we see some areas for improvement, we're not too worried about SAIC Motor's balance sheet. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with SAIC Motor .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com