Great Wall Motor (HKG:2333) Seems To Use Debt Quite Sensibly

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. Importantly, Great Wall Motor Company Limited (HKG:2333) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Great Wall Motor

How Much Debt Does Great Wall Motor Carry?

The image below, which you can click on for greater detail, shows that at September 2022 Great Wall Motor had debt of CN¥29.7b, up from CN¥21.3b in one year. However, it does have CN¥41.9b in cash offsetting this, leading to net cash of CN¥12.2b.

A Look At Great Wall Motor's Liabilities

The latest balance sheet data shows that Great Wall Motor had liabilities of CN¥86.9b due within a year, and liabilities of CN¥26.5b falling due after that. Offsetting these obligations, it had cash of CN¥41.9b as well as receivables valued at CN¥34.6b due within 12 months. So its liabilities total CN¥36.9b more than the combination of its cash and short-term receivables.

Given Great Wall Motor has a humongous market capitalization of CN¥201.5b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Great Wall Motor boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Great Wall Motor has seen its EBIT plunge 20% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 Great Wall Motor 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. Great Wall Motor may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Great Wall Motor actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Great Wall Motor does have more liabilities than liquid assets, it also has net cash of CN¥12.2b. The cherry on top was that in converted 124% of that EBIT to free cash flow, bringing in CN¥6.9b. So we don't have any problem with Great Wall Motor's use of debt. 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. We've identified 1 warning sign with Great Wall Motor , and understanding them should be part of your investment process.

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.