These 4 Measures Indicate That Solid Automotive Berhad (KLSE:SOLID) Is Using Debt Reasonably Well

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.' 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. Importantly, Solid Automotive Berhad (KLSE:SOLID) does carry debt. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

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. 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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Solid Automotive Berhad Carry?

The image below, which you can click on for greater detail, shows that Solid Automotive Berhad had debt of RM34.2m at the end of April 2025, a reduction from RM39.2m over a year. But on the other hand it also has RM46.0m in cash, leading to a RM11.8m net cash position.

How Healthy Is Solid Automotive Berhad's Balance Sheet?

The latest balance sheet data shows that Solid Automotive Berhad had liabilities of RM77.2m due within a year, and liabilities of RM4.26m falling due after that. Offsetting these obligations, it had cash of RM46.0m as well as receivables valued at RM77.3m due within 12 months. So it can boast RM41.9m more liquid assets than total liabilities.

This surplus liquidity suggests that Solid Automotive Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Solid Automotive Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Solid Automotive Berhad

Shareholders should be aware that Solid Automotive Berhad's EBIT was down 76% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Considering the last three years, Solid Automotive Berhad actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Solid Automotive Berhad has RM11.8m in net cash and a decent-looking balance sheet. So we are not troubled with Solid Automotive Berhad's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Solid Automotive Berhad has 2 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.