Howard Marks says that instead of worrying about stock price fluctuations, “the possibility of permanent loss is the risk I worry about…and every practicing investor I know worries about that.” You expressed it well. So when you think about the risk of a particular stock, it might be obvious that you need to consider debt. Because too much debt can sink a company. the important thing is, Geely Automobile Holding Co., Ltd. (HKG:175) has debt. But should shareholders be worried about its use of debt?
When is debt dangerous?
Debt supports a company until the company has difficulty paying it back with new capital or free cash flow. In the worst case scenario, a company may go bankrupt if it is unable to pay its creditors. Although this is less common, we often see debt-laden companies permanently diluting shareholders as lenders force them to raise capital at distressed prices. However, as an alternative to dilution, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When investigating debt levels, we first consider both cash and debt levels together.
Check out our latest analysis for Geely Automobile Holdings.
What is Geely Automobile Holdings’ net debt?
As shown below, Geely Automobile Holding’s debt was C$4.1 billion as of June 2023, down from C$12.4 billion in the same period last year. However, it also has CA$32.8b in cash offsetting this, meaning it has CA$28.7b in net cash.
How strong is Geely Automobile Holdings’ balance sheet?
The latest balance sheet data shows that Geely Automobile Holdings had liabilities of CA$74.3 billion falling due within a year, and liabilities of CA$8.82 billion falling due after that. Offsetting this, it had CA$32.8b in cash and CA$31.2b in receivables due within 12 months. So it has liabilities of CA$19b more than its cash and short-term receivables, combined.
This deficit is not too severe since Geely Automobile Holding is valued at a hefty C$73.1 billion and could potentially raise enough capital to shore up its balance sheet if needed. However, it’s still worth carefully considering the company’s ability to repay its debt. Despite its notable debt, Geely Automobile Holding boasts net cash, so it’s fair to say it doesn’t have a significant amount of debt.
What’s even more impressive is the fact that Geely Automobile Holdings grew its EBIT by 995% over twelve months. This boost will make future debt repayments easier. The balance sheet is clearly the area to focus on when analyzing debt. However, what will determine whether Geely Automobile Holding can maintain a healthy balance sheet in the future will be its future earnings above all else.If you’re focused on the future, check this out free A report showing analyst profit forecasts.
Finally, companies need free cash flow to pay down debt. Accounting profits alone are not enough. Geely Automobile Holdings has net cash on its balance sheet, but it’s worth considering its ability to convert earnings before interest and tax (EBIT) to free cash flow, and how quickly it builds (or (Erosion) Cash balance. Over the past three years, Geely Automobile Holdings actually generated more free cash flow than its EBIT. This kind of powerful redemption excites us as much as the audience at a Daft Punk concert when the beat drops.
summary
Although Geely Automobile Holding has more debt than current assets, it also has net cash of C$28.7 billion. And his free cash flow of CA$3.9b, representing 329% of EBIT, was also impressive. Therefore, we do not believe that Geely Automobile Holdings’ use of debt is risky. When analyzing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet, far from it.Case in point: we discovered 1 warning sign for Geely Automobile Holding you should know.
At the end of the day, it’s often better to focus on companies with no net debt. You can access a special list of such companies (all with a track record of profit growth). It’s free.
Valuation is complex, but we help make it simple.
Check out our comprehensive analysis, including below, to see if Geely Automobile Holdings is potentially overvalued or undervalued. Fair value estimates, risks and caveats, dividends, insider trading, and financial health.
See free analysis
Have feedback on this article? Curious about its content? contact Please contact us directly. Alternatively, email our editorial team at Simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.