Is Geely Automobile Holdings (HKG:175) Using Too Much Debt?

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 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. Importantly, Geely Automobile Holdings Limited (HKG:175) does carry debt. But should shareholders be worried about its use of debt?

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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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Geely Automobile Holdings's Net Debt?

As you can see below, at the end of March 2025, Geely Automobile Holdings had CN¥19.5b of debt, up from CN¥5.49b a year ago. Click the image for more detail. But it also has CN¥35.2b in cash to offset that, meaning it has CN¥15.8b net cash.

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¥155.5b due within 12 months and liabilities of CN¥18.4b due beyond that. On the other hand, it had cash of CN¥35.2b and CN¥73.9b worth of receivables due within a year. So its liabilities total CN¥64.8b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Geely Automobile Holdings has a huge market capitalization of CN¥174.5b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Geely Automobile Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Geely Automobile Holdings

Even more impressive was the fact that Geely Automobile Holdings grew its EBIT by 226% 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 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 company can only pay off debt with cold hard cash, not accounting profits. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Geely Automobile Holdings does have more liabilities than liquid assets, it also has net cash of CN¥15.8b. The cherry on top was that in converted 197% of that EBIT to free cash flow, bringing in CN¥14b. So is Geely Automobile Holdings's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Geely Automobile Holdings has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.