We Think Li Auto (NASDAQ:LI) Can Manage Its Debt With Ease

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. As with many other companies Li Auto Inc. (NASDAQ:LI) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.

View our latest analysis for Li Auto

How Much Debt Does Li Auto Carry?

As you can see below, Li Auto had CN¥8.94b of debt at March 2024, down from CN¥9.34b a year prior. But it also has CN¥98.9b in cash to offset that, meaning it has CN¥89.9b net cash.

A Look At Li Auto's Liabilities

According to the last reported balance sheet, Li Auto had liabilities of CN¥75.6b due within 12 months, and liabilities of CN¥12.3b due beyond 12 months. Offsetting these obligations, it had cash of CN¥98.9b as well as receivables valued at CN¥77.3m due within 12 months. So it actually has CN¥11.1b more liquid assets than total liabilities.

This short term liquidity is a sign that Li Auto could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Li Auto boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Li Auto made a loss at the EBIT level, last year, it was also good to see that it generated CN¥6.4b in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Li Auto's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Li Auto 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. Happily for any shareholders, Li Auto actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Li Auto has CN¥89.9b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥33b, being 515% of its EBIT. So is Li Auto's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Li Auto 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.