These 4 Measures Indicate That Great Wall Motor (HKG:2333) Is Using Debt Reasonably Well

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 Great Wall Motor Company Limited (HKG:2333) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Great Wall Motor

What Is Great Wall Motor's Net Debt?

As you can see below, at the end of March 2022, Great Wall Motor had CN¥24.0b of debt, up from CN¥20.2b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥27.5b in cash, so it actually has CN¥3.54b net cash.

How Healthy Is Great Wall Motor's Balance Sheet?

According to the last reported balance sheet, Great Wall Motor had liabilities of CN¥89.3b due within 12 months, and liabilities of CN¥20.8b due beyond 12 months. On the other hand, it had cash of CN¥27.5b and CN¥49.2b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥33.4b.

Since publicly traded Great Wall Motor shares are worth a very impressive total of CN¥297.3b, it seems unlikely that this level of liabilities would be a major 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!

It is just as well that Great Wall Motor's load is not too heavy, because its EBIT was down 41% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 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. Happily for any shareholders, Great Wall Motor actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Great Wall Motor does have more liabilities than liquid assets, it also has net cash of CN¥3.54b. The cherry on top was that in converted 108% of that EBIT to free cash flow, bringing in CN¥8.8b. So we are not troubled with Great Wall Motor's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Great Wall Motor that you should be aware of before investing here.

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.