Geely Automobile Holdings (HKG:175) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Geely Automobile Holdings Limited (HKG:175) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Geely Automobile Holdings

How Much Debt Does Geely Automobile Holdings Carry?

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. However, it does have CN¥32.8b in cash offsetting this, leading to net cash of CN¥28.7b.

A Look At Geely Automobile Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Geely Automobile Holdings had liabilities of CN¥74.3b due within 12 months and liabilities of CN¥8.82b due beyond that. Offsetting these obligations, it had cash of CN¥32.8b as well as receivables valued at CN¥31.2b 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¥90.9b, and thus could probably raise enough capital to shore up 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, Geely Automobile Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

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. 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 Geely Automobile Holdings 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, 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. The cherry on top was that in converted 329% of that EBIT to free cash flow, bringing in CN¥3.9b. So we don't think Geely Automobile Holdings's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Geely Automobile Holdings .

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.