“Investing In Alibaba Was The Biggest Mistake”: Charlie Munger

The vice chairman of Berkshire Hathaway, Charlie Munger, talks about his worst investment mistake. He opened up about his investment problem at the Daily Journal annual shareholder meeting on February 15. He mentioned that investing in the Chinese e-commerce and tech company Alibaba was his worst investment mistake.

Charlie Munger was the newspaper’s publisher Daily Journal till last year and worked on the board of directors.
According to valid reports, DailyJournal is a conglomerate that owns individual stocks in different firms like Wells Fargo, Bank of America, and Alibaba.

Charlie Munger talked about the investment in Alibaba group in an interview mentioning that he finds Alibaba as one of the biggest mistakes that he has made. He was attracted to the e-commerce platform because of its position in the Chinese Market, and he forgot to consider that the company works as a retailer.

Alibaba’s shares have declined since late 2020 after the co-founder and former executive chairman Jack Ma talked about the Chinese banks and regulators condemning their action. Ma has alleged that the state-operated banks have a pawnshop mentality and called for new operators that can provide credit to the companies with not much collateral.

Is Alibaba Group Holding a Risky Business?

There are many factors that should be taken into consideration when one invests in companies. Alibaba Group Holding Limited makes use of debt, but the main question lies if the debt is pushing the company to a riskier side.
Debt is a tool that allows businesses to expand, but if the business is incapable of paying off the debt, then the situation turns vulnerable for the company.

The worst-case scenario is that a company may go bankrupt if it is unable to pay its creditors. But the most common approach to escape the credits is that it raises new equity capital at a low price, thus diluting the shareholders permanently.

Most companies use debt to operate growth and have not faced negative consequences. Debt levels are taken into account by considering the debt and levels of cash simultaneously.

According to data, it is evident that Alibaba Group Holding Limited had a total debt accounting of 161.4 billion Chinese Yuan, which has increased drastically from 151.8 billion Chinese Yuan a year ago. But, the company has CNY487.1 billion in cash to overcome the debt. Thus, the company has 325.7 billion Chinese Yuan net cash.

As per the balance sheet of the Alibaba Group, it has the last reported liabilities of 382.9 billion Chinese Yuan, which is to be paid off in 12 months. Other than the obligations, the company has cash deposits of 487.1 billion Chinese Yuan as well as receivables. The latter has been estimated to be 71.2 billion Chinese Yuan. So, Alibaba group has total liabilities compromising 81.5 billion Chinese Yuan based on the combination of cash and near-term receivables.

Alibaba Group Holding has a large market capitalization of 1.88 trillion Chinese Yuan. It can be difficult to imagine that the liabilities pose a threat to the investors. But, it is worth keeping an eye on the strength of the balance sheet as it changes over time. The company has humongous cash, so it can easily overcome the debt.
But the other side of the story is that Alibaba Group saw a decline of its EBIT by 6.0 percent in the last year. If the valuation is sustained, it will make the debt harder to handle. But, the future profitability of the group can define if it can strengthen its balance sheet over time.

Last but not least, a company needs free cash flow to pay off debt; accounting profits simply aren’t enough. Even though Alibaba Group Holding has net cash on its balance sheet, it is still interesting to examine how effectively it converts earnings before interest and tax (EBIT) to free cash flow because this will have an impact on the company’s need for and ability to manage debt. Fortunately for any shareholders, over the past three years,

Alibaba Group Holding generated more free cash flow than EBIT.

Lastly, Alibaba Hroup’s holdings investment sows two risk signs, including the low-profit percentage, which has declined by 1.6 percent to the previous year and the large one-off items that would impact the financial results.

Edited by Prakriti Arora