Anhui Jianghuai Automobile GroupLtd (SHSE:600418) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Anhui Jianghuai Automobile Group Corp.,Ltd. (SHSE:600418) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Anhui Jianghuai Automobile GroupLtd

What Is Anhui Jianghuai Automobile GroupLtd's Net Debt?

As you can see below, Anhui Jianghuai Automobile GroupLtd had CN¥8.32b of debt at September 2023, down from CN¥11.6b a year prior. However, it does have CN¥14.3b in cash offsetting this, leading to net cash of CN¥5.97b.

How Strong Is Anhui Jianghuai Automobile GroupLtd's Balance Sheet?

According to the last reported balance sheet, Anhui Jianghuai Automobile GroupLtd had liabilities of CN¥31.2b due within 12 months, and liabilities of CN¥5.35b due beyond 12 months. Offsetting these obligations, it had cash of CN¥14.3b as well as receivables valued at CN¥8.50b due within 12 months. So it has liabilities totalling CN¥13.8b more than its cash and near-term receivables, combined.

Anhui Jianghuai Automobile GroupLtd has a market capitalization of CN¥31.9b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Anhui Jianghuai Automobile GroupLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Anhui Jianghuai Automobile GroupLtd'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.

Over 12 months, Anhui Jianghuai Automobile GroupLtd reported revenue of CN¥43b, which is a gain of 16%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Anhui Jianghuai Automobile GroupLtd?

Although Anhui Jianghuai Automobile GroupLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥2.8b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Anhui Jianghuai Automobile GroupLtd's profit, revenue, and operating cashflow have changed over the last few years.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.