Does Solid Automotive Berhad (KLSE:SOLID) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Solid Automotive Berhad (KLSE:SOLID) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Solid Automotive Berhad

What Is Solid Automotive Berhad's Debt?

As you can see below, Solid Automotive Berhad had RM39.2m of debt at April 2024, down from RM55.4m a year prior. However, it does have RM102.8m in cash offsetting this, leading to net cash of RM63.6m.

How Healthy Is Solid Automotive Berhad's Balance Sheet?

The latest balance sheet data shows that Solid Automotive Berhad had liabilities of RM76.2m due within a year, and liabilities of RM7.12m falling due after that. Offsetting this, it had RM102.8m in cash and RM71.7m in receivables that were due within 12 months. So it actually has RM91.1m more liquid assets than total liabilities.

This luscious liquidity implies that Solid Automotive Berhad's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Solid Automotive Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Solid Automotive Berhad grew its EBIT by 169% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Solid Automotive Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Solid Automotive Berhad 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, Solid Automotive Berhad reported free cash flow worth 19% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Solid Automotive Berhad has RM63.6m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 169% over the last year. So is Solid Automotive Berhad's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for Solid Automotive Berhad that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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