Here’s why Xiaomi (HKG:1810) can manage your debt responsibly

Here’s why Xiaomi (HKG:1810) can manage your debt responsibly

Legendary fund manager Li Lu (who was endorsed by Charlie Munger) once said, “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of principal.” So it seems that the smart money knows that debt, which is usually involved in bankruptcies, is a very important factor when evaluating how risky a company is. we note that Xiaomi Corporation (Hong Kong: 1810) has debt on its balance sheet. But should shareholders be concerned about their use of debt?

When is debt dangerous?

Debt and other liabilities become risky for a company when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case, a company can go bankrupt if it cannot pay its creditors. A more frequent (but still costly) occurrence, however, is when a company must issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, many companies use debt to finance growth, without negative consequences. When we look at debt levels, we first consider cash and debt levels together.

Our analysis indicates that 1810 is potentially underrated!

How much debt does Xiaomi have?

As you can see below, at the end of June 2022, Xiaomi was CN¥33.8b in debt, up from CN¥19.3b a year earlier. Click on the image for more details. However, his balance shows that he has CN¥74.9b in cash, so he actually has CN¥41.1b in net cash.

debt-equity-history-analysis
SEHK: 1810 Debt-to-Equity History Oct 26, 2022

A look at Xiaomi’s responsibilities

If we zoom in on the latest balance sheet data, we can see that Xiaomi had liabilities of CN Yen 107.3 trillion due in 12 months and liabilities of CN Yen 44.9 trillion due beyond that. To offset these obligations, she had cash of CN¥74.9b as well as accounts receivable valued at CN¥40.2b due within 12 months. Therefore, she has liabilities totaling CN¥37.1b more than her cash and short-term receivables combined.

Given that Xiaomi’s publicly traded shares have an impressive total value of CN¥209.6b, it seems unlikely that this level of liability would be a major threat. However, we think it’s worth keeping an eye on the strength of your balance sheet as it can change over time. Despite his notable liabilities, Xiaomi has net cash, so it’s fair to say that she doesn’t have a huge debt load.

In fact, what saves Xiaomi is its low levels of debt, as its EBIT has plummeted 25% in the last twelve months. When a business sees its profits plateau, it can sometimes find its relationships with its lenders turn sour. When looking at debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Xiaomi’s ability to maintain a healthy balance sheet going forward. So if you want to see what the pros think, you might find this free report on analyst earnings forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; you need cold cash. Xiaomi may have net cash on the balance sheet, but it’s still interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, because that will influence both your need and your ability to manage. Debt. Over the last three years, Xiaomi produced a solid free cash flow equivalent to 59% of its EBIT, more or less what we would expect. This free cash flow puts the business in a good position to pay down debt, when applicable.

summarizing

Although Xiaomi has more liabilities than liquid assets, it also has net cash of CN¥41.1b. So we have no problem with the use of Xiaomi debt. When looking at debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides on the balance sheet, far from it. We have identified 2 warning signs with Xiaomi (at least 1 which bothers us a bit) and understanding them should be part of your investment process.

If, after all that, you’re more interested in a fast-growing company with a rock-solid balance sheet, check out our list of net cash growth stocks without delay.

Titration is complex, but we’re helping to simplify it.

find out if xiaomi is potentially overvalued or undervalued by consulting our comprehensive analysis, which includes fair value estimates, risks and caveats, dividends, internal transactions and financial health.

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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 as financial advice. It is not a recommendation to buy or sell any stock, and it does not take into account your goals or financial situation. Our goal is to provide you with long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

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