We Think BYD (HKG:1211) Can Stay On Top Of Its Debt

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.' 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 can see that BYD Company Limited (HKG:1211) does use debt in its business. 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for BYD

How Much Debt Does BYD Carry?

The image below, which you can click on for greater detail, shows that at September 2024 BYD had debt of CN¥40.1b, up from CN¥25.2b in one year. However, its balance sheet shows it holds CN¥91.7b in cash, so it actually has CN¥51.6b net cash.

A Look At BYD's Liabilities

We can see from the most recent balance sheet that BYD had liabilities of CN¥512.1b falling due within a year, and liabilities of CN¥83.4b due beyond that. Offsetting these obligations, it had cash of CN¥91.7b as well as receivables valued at CN¥123.5b due within 12 months. So it has liabilities totalling CN¥380.2b more than its cash and near-term receivables, combined.

BYD has a very large market capitalization of CN¥938.2b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, BYD also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that BYD grew its EBIT by 16% last year, making its debt load easier to handle. 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 BYD'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. BYD 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. Happily for any shareholders, BYD actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While BYD does have more liabilities than liquid assets, it also has net cash of CN¥51.6b. The cherry on top was that in converted 108% of that EBIT to free cash flow, bringing in CN¥37b. So we don't think BYD's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in BYD, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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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.