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Does Nexteer Automotive Group (HKG:1316) Have A Healthy Balance Sheet?
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 note that Nexteer Automotive Group Limited (HKG:1316) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Nexteer Automotive Group
What Is Nexteer Automotive Group's Net Debt?
The image below, which you can click on for greater detail, shows that Nexteer Automotive Group had debt of US$47.9m at the end of June 2023, a reduction from US$106.8m over a year. But on the other hand it also has US$290.1m in cash, leading to a US$242.2m net cash position.
A Look At Nexteer Automotive Group's Liabilities
According to the last reported balance sheet, Nexteer Automotive Group had liabilities of US$1.05b due within 12 months, and liabilities of US$313.3m due beyond 12 months. Offsetting these obligations, it had cash of US$290.1m as well as receivables valued at US$948.3m due within 12 months. So it has liabilities totalling US$120.0m more than its cash and near-term receivables, combined.
Given Nexteer Automotive Group has a market capitalization of US$1.40b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Nexteer Automotive Group also has more cash than debt, so we're pretty confident it can manage its debt safely.
Even more impressive was the fact that Nexteer Automotive Group grew its EBIT by 247% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Nexteer Automotive Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Nexteer Automotive Group 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, Nexteer Automotive Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing Up
While it is always sensible to look at a company's total liabilities, it is very reassuring that Nexteer Automotive Group has US$242.2m in net cash. And it impressed us with free cash flow of US$88m, being 100% of its EBIT. So we don't think Nexteer Automotive Group's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Nexteer Automotive Group that you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.
About SEHK:1316
Nexteer Automotive Group
A motion control technology company, develop, manufacture, and supply advanced steering and driveline systems to original equipment manufacturer worldwide.
Flawless balance sheet with moderate growth potential.