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David Iben put it well when he said: “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We note that Nexteer Automotive Group Limited (HKG: 1316) has debt on its balance sheet. But the most important question is: what risk does this debt create?
When is debt dangerous?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest analysis for Nexteer Automotive Group
What is the debt of Nexteer Automotive Group?
The image below, which you can click for more details, shows that Nexteer Automotive Group had a debt of $ 114.3 million at the end of June 2021, a reduction from $ 302.4 million. US over one year. But it also has $ 328.2 million in cash to make up for that, which means it has $ 213.9 million in net cash.
A look at the liabilities of Nexteer Automotive Group
Zooming in on the latest balance sheet data, we can see that Nexteer Automotive Group had a liability of US $ 917.1 million due within 12 months and a liability of US $ 267.7 million due beyond. In compensation for these obligations, it had cash of US $ 328.2 million as well as receivables valued at US $ 718.3 million at 12 months. It therefore has a liability totaling US $ 138.3 million more than its combined cash and short-term receivables.
Of course, Nexteer Automotive Group has a market capitalization of US $ 2.56 billion, so this liability is probably manageable. Having said that, it is clear that we must continue to monitor his record lest it get worse. While it has some liabilities to note, Nexteer Automotive Group also has more cash than debt, so we’re pretty confident it can handle its debt safely.
On top of that, Nexteer Automotive Group has increased its EBIT by 68% over the past twelve months, and this growth will make it easier to process its debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine the ability of Nexteer Automotive Group to maintain a healthy balance sheet going forward. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. Nexteer Automotive Group may have net cash on the balance sheet, but it is always interesting to consider the extent to which the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Over the past three years, Nexteer Automotive Group’s free cash flow has amounted to 47% of its EBIT, less than we expected. This low cash conversion makes debt management more difficult.
In summary
While it always makes sense to look at a company’s total liabilities, it is very reassuring that Nexteer Automotive Group has $ 213.9 million in net cash. And it impressed us with its EBIT growth of 68% compared to last year. Is the debt of Nexteer Automotive Group therefore a risk? It does not seem to us. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for Nexteer Automotive Group you should know.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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