Is Geely Automobile Holdings (HKG:175) A Risky Investment?

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.' 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 can see that Geely Automobile Holdings Limited (HKG:175) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Geely Automobile Holdings

What Is Geely Automobile Holdings's Net Debt?

As you can see below, at the end of September 2024, Geely Automobile Holdings had CN¥6.75b of debt, up from CN¥5.44b a year ago. Click the image for more detail. But on the other hand it also has CN¥39.3b in cash, leading to a CN¥32.6b net cash position.

How Strong Is Geely Automobile Holdings' Balance Sheet?

We can see from the most recent balance sheet that Geely Automobile Holdings had liabilities of CN¥104.7b falling due within a year, and liabilities of CN¥12.2b due beyond that. Offsetting this, it had CN¥39.3b in cash and CN¥49.3b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥28.3b.

Given Geely Automobile Holdings has a humongous market capitalization of CN¥167.0b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

Better yet, Geely Automobile Holdings grew its EBIT by 131% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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. Happily for any shareholders, Geely Automobile Holdings 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 Geely Automobile Holdings does have more liabilities than liquid assets, it also has net cash of CN¥32.6b. The cherry on top was that in converted 323% of that EBIT to free cash flow, bringing in CN¥11b. So is Geely Automobile Holdings's debt a risk? It doesn't seem so to us. 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. Be aware that Geely Automobile Holdings is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.