These 4 Measures Indicate That Geely Automobile Holdings (HKG:175) Is Using Debt Safely

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. 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?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

See our latest analysis for Geely Automobile Holdings

What Is Geely Automobile Holdings's Debt?

The image below, which you can click on for greater detail, shows that Geely Automobile Holdings had debt of CN¥5.44b at the end of December 2023, a reduction from CN¥10.8b over a year. However, it does have CN¥35.7b in cash offsetting this, leading to net cash of CN¥30.3b.

A Look At Geely Automobile Holdings' Liabilities

According to the last reported balance sheet, Geely Automobile Holdings had liabilities of CN¥96.8b due within 12 months, and liabilities of CN¥10.6b due beyond 12 months. Offsetting these obligations, it had cash of CN¥35.7b as well as receivables valued at CN¥42.9b due within 12 months. So it has liabilities totalling CN¥28.8b more than its cash and near-term receivables, combined.

Geely Automobile Holdings has a very large market capitalization of CN¥82.2b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 212% 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 ultimately the future profitability of the business will decide if Geely Automobile Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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¥30.3b. And it impressed us with free cash flow of CN¥7.2b, being 405% of its EBIT. So we don't think Geely Automobile Holdings's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Geely Automobile Holdings, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.