BAIC Motor (HKG:1958) Takes On Some Risk With Its Use Of Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies BAIC Motor Corporation Limited (HKG:1958) makes use of debt. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does BAIC Motor Carry?

You can click the graphic below for the historical numbers, but it shows that BAIC Motor had CN¥5.10b of debt in March 2025, down from CN¥10.4b, one year before. But it also has CN¥32.9b in cash to offset that, meaning it has CN¥27.8b net cash.

How Strong Is BAIC Motor's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that BAIC Motor had liabilities of CN¥80.7b due within 12 months and liabilities of CN¥8.66b due beyond that. Offsetting these obligations, it had cash of CN¥32.9b as well as receivables valued at CN¥18.2b due within 12 months. So its liabilities total CN¥38.2b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥13.9b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, BAIC Motor would likely require a major re-capitalisation if it had to pay its creditors today. Given that BAIC Motor has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Check out our latest analysis for BAIC Motor

The modesty of its debt load may become crucial for BAIC Motor if management cannot prevent a repeat of the 29% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 BAIC Motor'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While BAIC Motor 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. During the last three years, BAIC Motor produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While BAIC Motor does have more liabilities than liquid assets, it also has net cash of CN¥27.8b. And it impressed us with free cash flow of CN¥16b, being 69% of its EBIT. Despite its cash we think that BAIC Motor seems to struggle to handle its total liabilities, so we are wary of the stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with BAIC Motor .

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.