Solid Automotive Berhad (KLSE:SOLID) Has A Rock Solid Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Solid Automotive Berhad (KLSE:SOLID) does use debt in its business. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Solid Automotive Berhad

What Is Solid Automotive Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of January 2022 Solid Automotive Berhad had RM50.8m of debt, an increase on RM41.2m, over one year. But it also has RM59.3m in cash to offset that, meaning it has RM8.52m net cash.

A Look At Solid Automotive Berhad's Liabilities

The latest balance sheet data shows that Solid Automotive Berhad had liabilities of RM80.1m due within a year, and liabilities of RM23.2m falling due after that. Offsetting this, it had RM59.3m in cash and RM74.1m in receivables that were due within 12 months. So it can boast RM30.1m more liquid assets than total liabilities.

This excess liquidity suggests that Solid Automotive Berhad is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Solid Automotive Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Solid Automotive Berhad grew its EBIT by 107% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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. Solid Automotive Berhad 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. During the last three years, Solid Automotive Berhad generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Solid Automotive Berhad has RM8.52m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in RM7.3m. The bottom line is that we do not find Solid Automotive Berhad's debt levels at all concerning. 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 instance, we've identified 1 warning sign for Solid Automotive Berhad that you should be aware of.

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.