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Alibaba Group Holding (NYSE:BABA) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Alibaba Group Holding Limited (NYSE:BABA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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View our latest analysis for Alibaba Group Holding

What Is Alibaba Group Holding's Debt?

The image below, which you can click on for greater detail, shows that Alibaba Group Holding had debt of CN¥125.4b at the end of March 2020, a reduction from CN¥134.3b over a year. But on the other hand it also has CN¥363.2b in cash, leading to a CN¥237.8b net cash position.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At Alibaba Group Holding's Liabilities

According to the last reported balance sheet, Alibaba Group Holding had liabilities of CN¥241.9b due within 12 months, and liabilities of CN¥200.6b due beyond 12 months. Offsetting these obligations, it had cash of CN¥363.2b as well as receivables valued at CN¥43.6b due within 12 months. So its liabilities total CN¥35.6b more than the combination of its cash and short-term receivables.

Having regard to Alibaba Group Holding's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥4.71t company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Alibaba Group Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Alibaba Group Holding grew its EBIT by 53% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Alibaba Group Holding can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Alibaba Group Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Alibaba Group Holding actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

We could understand if investors are concerned about Alibaba Group Holding's liabilities, but we can be reassured by the fact it has has net cash of CN¥237.8b. And it impressed us with free cash flow of CN¥148b, being 152% of its EBIT. So is Alibaba Group Holding's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Alibaba Group Holding you should be aware of.

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

This article by Simply Wall St is general in nature. 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.

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