These 4 Measures Indicate That Great Wall Motor (HKG:2333) 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Great Wall Motor Company Limited (HKG:2333) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Great Wall Motor

What Is Great Wall Motor's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Great Wall Motor had CN¥26.3b of debt in September 2024, down from CN¥30.9b, one year before. However, it does have CN¥43.8b in cash offsetting this, leading to net cash of CN¥17.5b.

How Strong Is Great Wall Motor's Balance Sheet?

The latest balance sheet data shows that Great Wall Motor had liabilities of CN¥107.1b due within a year, and liabilities of CN¥19.9b falling due after that. Offsetting this, it had CN¥43.8b in cash and CN¥45.1b in receivables that were due within 12 months. So it has liabilities totalling CN¥38.2b more than its cash and near-term receivables, combined.

Of course, Great Wall Motor has a titanic market capitalization of CN¥198.8b, so these liabilities are probably manageable. 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!

Even more impressive was the fact that Great Wall Motor grew its EBIT by 149% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Great Wall Motor 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Great Wall 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. Over the most recent three years, Great Wall Motor recorded free cash flow worth 80% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although Great Wall Motor's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥17.5b. And we liked the look of last year's 149% year-on-year EBIT growth. So we don't think Great Wall Motor's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Great Wall Motor, you may well want to click here to check an interactive graph of its earnings per share history.

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.