David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Nexteer Automotive Group Limited (HKG:1316) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Nexteer Automotive Group
What Is Nexteer Automotive Group’s Debt?
The image below, which you can click on for greater detail, shows that Nexteer Automotive Group had debt of US$84.4m at the end of December 2021, a reduction from US$248.6m over a year. But on the other hand it also has US$326.5m in cash, leading to a US$242.1m net cash position.
A Look At Nexteer Automotive Group’s Liabilities
We can see from the most recent balance sheet that Nexteer Automotive Group had liabilities of US$942.1m falling due within a year, and liabilities of US$261.8m due beyond that. On the other hand, it had cash of US$326.5m and US$745.1m worth of receivables due within a year. So it has liabilities totaling US$132.3m more than its cash and near-term receivables, combined.
Since publicly traded Nexteer Automotive Group shares are worth a total of US$1.79b, it seems unlikely that this level of liabilities would be a major threat. 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, Nexteer Automotive Group also has more cash than debt, so we’re pretty confident it can manage its debt safely.
It is just as well that Nexteer Automotive Group’s load is not too heavy, because its EBIT was down 34% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analyzing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Nexteer Automotive Group can strengthen its balance sheet over time. 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. While Nexteer Automotive Group has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Nexteer Automotive Group recorded free cash flow of 44% of its EBIT, which is weaker than we’d expect. That’s not great, when it comes to paying down debt.
While it is always sensible to look at a company’s total liabilities, it is very reassuring that Nexteer Automotive Group has US$242.1m in net cash. So we don’t have any problem with Nexteer Automotive Group’s use of debt. 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. For instance, we’ve identified 1 warning sign for Nexteer Automotive Group that you should be aware of.
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.