Is XPeng (NYSE:XPEV) A Risky Investment?

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. We can see that XPeng Inc. (NYSE:XPEV) does use debt in its business. But is this debt a concern to shareholders?

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. 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. 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 XPeng

What Is XPeng's Debt?

The chart below, which you can click on for greater detail, shows that XPeng had CN¥11.6b in debt in March 2024; about the same as the year before. But on the other hand it also has CN¥33.6b in cash, leading to a CN¥22.0b net cash position.

A Look At XPeng's Liabilities

The latest balance sheet data shows that XPeng had liabilities of CN¥33.5b due within a year, and liabilities of CN¥11.3b falling due after that. Offsetting these obligations, it had cash of CN¥33.6b as well as receivables valued at CN¥4.01b due within 12 months. So it has liabilities totalling CN¥7.14b more than its cash and near-term receivables, combined.

Of course, XPeng has a market capitalization of CN¥59.9b, 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. While it does have liabilities worth noting, XPeng also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine XPeng's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, XPeng reported revenue of CN¥33b, which is a gain of 42%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is XPeng?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months XPeng lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥1.4b of cash and made a loss of CN¥9.4b. While this does make the company a bit risky, it's important to remember it has net cash of CN¥22.0b. That kitty means the company can keep spending for growth for at least two years, at current rates. XPeng's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. To that end, you should be aware of the 2 warning signs we've spotted with XPeng .

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.