Is Nexteer Automotive Group (HKG:1316) A Risky Investment?

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. Importantly, Nexteer Automotive Group Limited (HKG:1316) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Nexteer Automotive Group

What Is Nexteer Automotive Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Nexteer Automotive Group had US$49.8m of debt in December 2022, down from US$84.4m, one year before. However, it does have US$245.9m in cash offsetting this, leading to net cash of US$196.1m.

How Healthy Is Nexteer Automotive Group's Balance Sheet?

The latest balance sheet data shows that Nexteer Automotive Group had liabilities of US$1.03b due within a year, and liabilities of US$331.7m falling due after that. On the other hand, it had cash of US$245.9m and US$952.5m worth of receivables due within a year. So it has liabilities totalling US$159.7m more than its cash and near-term receivables, combined.

Of course, Nexteer Automotive Group has a market capitalization of US$1.33b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Nexteer Automotive Group boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Nexteer Automotive Group's load is not too heavy, because its EBIT was down 20% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Nexteer Automotive Group's ability to maintain a healthy balance sheet going forward. 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. In the last three years, Nexteer Automotive Group's free cash flow amounted to 44% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

Although Nexteer Automotive Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$196.1m. So we are not troubled with Nexteer Automotive Group's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Nexteer Automotive Group you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.