Does Nexteer Automotive Group (HKG:1316) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Nexteer Automotive Group Limited (HKG:1316) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Nexteer Automotive Group

How Much Debt Does Nexteer Automotive Group Carry?

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. However, it does have US$290.1m in cash offsetting this, leading to net cash of US$242.2m.

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.

Since publicly traded Nexteer Automotive Group shares are worth a total of US$1.58b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Nexteer Automotive Group boasts net cash, so it's fair to say it does not have a heavy debt load!

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. While Nexteer Automotive Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Nexteer Automotive Group actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about Nexteer Automotive Group's liabilities, but we can be reassured by the fact it has has net cash of US$242.2m. 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. Over time, share prices tend to follow earnings per share, so if you're interested in Nexteer Automotive Group, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.