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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Baidu, Inc. (NASDAQ:BIDU) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Baidu Carry?
The image below, which you can click on for greater detail, shows that Baidu had debt of CN¥71.0b at the end of December 2024, a reduction from CN¥76.4b over a year. However, its balance sheet shows it holds CN¥127.7b in cash, so it actually has CN¥56.7b net cash.
How Strong Is Baidu's Balance Sheet?
According to the last reported balance sheet, Baidu had liabilities of CN¥81.0b due within 12 months, and liabilities of CN¥63.2b due beyond 12 months. On the other hand, it had cash of CN¥127.7b and CN¥14.3b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.
This state of affairs indicates that Baidu's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥221.5b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Baidu boasts net cash, so it's fair to say it does not have a heavy debt load!
Check out our latest analysis for Baidu
But the other side of the story is that Baidu saw its EBIT decline by 3.4% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 Baidu'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.