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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. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Nexteer Automotive Group Limited (HKG:1316) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Nexteer Automotive Group
How Much Debt Does Nexteer Automotive Group Carry?
The image below, which you can click on for greater detail, shows that Nexteer Automotive Group had debt of US$338.3m at the end of June 2019, a reduction from US$412.4m over a year. However, it does have US$585.5m in cash offsetting this, leading to net cash of US$247.1m.
How Healthy Is Nexteer Automotive Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Nexteer Automotive Group had liabilities of US$819.3m due within 12 months and liabilities of US$568.9m due beyond that. Offsetting this, it had US$585.5m in cash and US$646.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$156.7m.
Since publicly traded Nexteer Automotive Group shares are worth a total of US$2.08b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 22% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Nexteer Automotive Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.