Some say volatility, rather than debt, is the best way to think about risk as an investor, but 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 Great Wall Motor Company Limited (HKG:2333) uses debt. But does this debt worry shareholders?
What risk does debt carry?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own 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) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, many companies use debt to finance their growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest analysis for Great Wall Motor
How much debt does Great Wall Motor have?
You can click on the graph below for historical figures, but it shows that in September 2021, Great Wall Motor had a debt of 21.3 billion Canadian yen, an increase from 16.4 billion Canadian yen , over one year. However, his balance sheet shows that he holds 31.1 billion yen in cash, so he actually has 9.73 billion yen in cash.
A Look at Great Wall Motor’s Responsibilities
According to the last published balance sheet, Great Wall Motor had liabilities of 87.3 billion Canadian yen due within 12 months and liabilities of 20.4 billion national yen due beyond 12 months. On the other hand, it had a cash position of 31.1 billion Canadian yen and 53.2 billion national yen of receivables due within one year. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of 23.5 billion Canadian yen.
Of course, Great Wall Motor has a titanic market capitalization of 238.7 billion Canadian yen, so those liabilities are probably manageable. That said, it is clear that we must continue to monitor its record, lest it deteriorate. Despite its notable liabilities, Great Wall Motor has a net cash position, so it’s fair to say that it doesn’t have a lot of debt!
On top of that, Great Wall Motor has grown its EBIT by 31% over the last twelve months, and this growth will make it easier to manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Great Wall Motor’s 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.
Finally, a company can only repay its debts with cold hard cash, not with book profits. Although Great Wall Motor has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how fast it’s building (or erodes) this cash balance. Over the past three years, Great Wall Motor has actually produced more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.
We could understand if investors are worried about Great Wall Motor’s liabilities, but we can take comfort in the fact that it has a net cash position of 9.73 billion Canadian yen. The icing on the cake was to convert 108% of this EBIT into free cash flow, bringing in 12 billion Canadian yen. So is Great Wall Motor’s debt a risk? This does not seem to us to be the case. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we have identified 3 warning signs for Great Wall Motor of which you should be aware.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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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.