Is Anhui Jianghuai Automobile GroupLtd (SHSE:600418) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 Anhui Jianghuai Automobile Group Corp.,Ltd. (SHSE:600418) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Anhui Jianghuai Automobile GroupLtd

What Is Anhui Jianghuai Automobile GroupLtd's Debt?

The image below, which you can click on for greater detail, shows that Anhui Jianghuai Automobile GroupLtd had debt of CN¥7.41b at the end of March 2024, a reduction from CN¥9.58b over a year. But on the other hand it also has CN¥15.2b in cash, leading to a CN¥7.76b net cash position.

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

We can see from the most recent balance sheet that Anhui Jianghuai Automobile GroupLtd had liabilities of CN¥28.2b falling due within a year, and liabilities of CN¥5.42b due beyond that. On the other hand, it had cash of CN¥15.2b and CN¥7.22b worth of receivables due within a year. So it has liabilities totalling CN¥11.2b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Anhui Jianghuai Automobile GroupLtd has a market capitalization of CN¥35.2b, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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 ultimately the future profitability of the business will decide if Anhui Jianghuai Automobile GroupLtd 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.

In the last year Anhui Jianghuai Automobile GroupLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to CN¥46b. With any luck the company will be able to grow its way to profitability.

So How Risky Is Anhui Jianghuai Automobile GroupLtd?

While Anhui Jianghuai Automobile GroupLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥109m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. One positive is that Anhui Jianghuai Automobile GroupLtd is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is risky. 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. Be aware that Anhui Jianghuai Automobile GroupLtd is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.