Alibaba Group Holding (NYSE:BABA) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Alibaba Group Holding Limited (NYSE:BABA) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Alibaba Group Holding

What Is Alibaba Group Holding's Debt?

The chart below, which you can click on for greater detail, shows that Alibaba Group Holding had CN¥166.7b in debt in September 2023; about the same as the year before. However, its balance sheet shows it holds CN¥574.4b in cash, so it actually has CN¥407.6b net cash.

How Healthy Is Alibaba Group Holding's Balance Sheet?

We can see from the most recent balance sheet that Alibaba Group Holding had liabilities of CN¥389.8b falling due within a year, and liabilities of CN¥251.7b due beyond that. Offsetting this, it had CN¥574.4b in cash and CN¥64.1b in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Alibaba Group Holding's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥1.24t company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Alibaba Group Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Alibaba Group Holding grew its EBIT by 33% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Alibaba Group Holding'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Alibaba Group Holding 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. Over the last three years, Alibaba Group Holding actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Alibaba Group Holding has CN¥407.6b in net cash. The cherry on top was that in converted 127% of that EBIT to free cash flow, bringing in CN¥179b. So we don't think Alibaba Group Holding's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Alibaba Group Holding, you may well want to click here to check an interactive graph of its earnings per share history.

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.