Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Great Wall Motor Company Limited (HKG:2333) does carry debt. But is this debt a concern to shareholders?

Our free stock report includes 2 warning signs investors should be aware of before investing in Great Wall Motor. Read for free now.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Great Wall Motor Carry?

You can click the graphic below for the historical numbers, but it shows that Great Wall Motor had CN¥19.8b of debt in December 2024, down from CN¥29.0b, one year before. However, it does have CN¥47.1b in cash offsetting this, leading to net cash of CN¥27.4b.

How Healthy Is Great Wall Motor's Balance Sheet?

The latest balance sheet data shows that Great Wall Motor had liabilities of CN¥122.2b due within a year, and liabilities of CN¥16.0b falling due after that. Offsetting this, it had CN¥47.1b in cash and CN¥55.7b in receivables that were due within 12 months. So it has liabilities totalling CN¥35.4b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Great Wall Motor has a huge market capitalization of CN¥173.5b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Great Wall Motor also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for Great Wall Motor

In addition to that, we're happy to report that Great Wall Motor has boosted its EBIT by 69%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Great Wall Motor 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 Great Wall Motor 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. Over the most recent three years, Great Wall Motor recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While Great Wall Motor does have more liabilities than liquid assets, it also has net cash of CN¥27.4b. And we liked the look of last year's 69% year-on-year EBIT growth. So is Great Wall Motor's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Great Wall Motor 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.