Does Geely Automobile Holdings (HKG:175) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Geely Automobile Holdings Limited (HKG:175) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Geely Automobile Holdings

What Is Geely Automobile Holdings's Net Debt?

As you can see below, Geely Automobile Holdings had CN¥4.10b of debt at June 2023, down from CN¥12.4b a year prior. But it also has CN¥32.8b in cash to offset that, meaning it has CN¥28.7b net cash.

How Strong Is Geely Automobile Holdings' Balance Sheet?

The latest balance sheet data shows that Geely Automobile Holdings had liabilities of CN¥74.3b due within a year, and liabilities of CN¥8.82b falling due after that. Offsetting this, it had CN¥32.8b in cash and CN¥31.2b in receivables that were due within 12 months. So it has liabilities totalling CN¥19.0b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Geely Automobile Holdings is worth a massive CN¥73.1b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Geely Automobile Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Geely Automobile Holdings grew its EBIT by 995% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Geely Automobile Holdings'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Geely Automobile Holdings 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. Over the last three years, Geely Automobile Holdings actually produced more free cash flow than EBIT. 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 Geely Automobile Holdings does have more liabilities than liquid assets, it also has net cash of CN¥28.7b. And it impressed us with free cash flow of CN¥3.9b, being 329% of its EBIT. So we don't think Geely Automobile Holdings'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. Case in point: We've spotted 1 warning sign for Geely Automobile Holdings 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.