Is Geely Automobile Holdings (HKG:175) a risky investment?

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Warren Buffett said: “Volatility is far from synonymous with risk. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies Geely Automotive Holdings Limited (HKG:175) uses debt. But the more important question is: what risk does this debt create?

What risk does debt carry?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.

Check out our latest analysis for Geely Automobile Holdings

What is the net debt of Geely Automobile Holdings?

You can click on the graph below for historical figures, but it shows that in June 2022, Geely Automobile Holdings had a debt of 12.4 billion Canadian yen, an increase from 3.87 billion Canadian yen , over one year. However, his balance sheet shows that he holds 37.6 billion yen in cash, so he actually has 25.1 billion yen in cash.

SEHK: 175 Historical Debt to Equity August 22, 2022

How healthy is Geely Automobile Holdings’ balance sheet?

We can see from the most recent balance sheet that Geely Automobile Holdings had liabilities of 58.7 billion yen due within one year, and liabilities of 9.55 billion yen due beyond. In compensation for these obligations, it had cash of 37.6 billion yen as well as receivables valued at 22.3 billion yen due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of 8.36 billion Canadian yen.

Given that Geely Automobile Holdings has a colossal market capitalization of 152.2 billion Canadian yen, it’s hard to believe that these liabilities pose a big threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future. Despite its notable liabilities, Geely Automobile Holdings has a net cash position, so it is fair to say that it is not very leveraged!

Luckily, Geely Automobile Holdings’ burden is not too heavy, as its EBIT fell by 96% over last year. When it comes to paying off debt, lower income is no more helpful than sugary sodas for your health. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Geely Automobile Holdings’ ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. Although Geely Automobile Holdings has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how fast it’s growing. builds (or erodes) cash balance. Over the past three years, Geely Automobile Holdings has actually produced more free cash flow than EBIT. This kind of high cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summary

We could understand if investors are worried about Geely Automobile Holdings’ liabilities, but we can take comfort in the fact that it has a net cash position of 25.1 billion Canadian yen. And it impressed us with a free cash flow of 14 billion Canadian yen, or 151% of its EBIT. We are therefore not concerned about Geely Automobile Holdings’ use of debt. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. We have identified 2 warning signs with Geely Automobile Holdings, and understanding them should be part of your investment process.

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

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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