Health Check: How Prudently Does FAW Jiefang GroupLtd (SZSE:000800) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that FAW Jiefang Group Co.,Ltd (SZSE:000800) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for FAW Jiefang GroupLtd

How Much Debt Does FAW Jiefang GroupLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 FAW Jiefang GroupLtd had CN¥31.6m of debt, an increase on none, over one year. But it also has CN¥32.5b in cash to offset that, meaning it has CN¥32.5b net cash.

A Look At FAW Jiefang GroupLtd's Liabilities

We can see from the most recent balance sheet that FAW Jiefang GroupLtd had liabilities of CN¥45.1b falling due within a year, and liabilities of CN¥5.12b due beyond that. Offsetting this, it had CN¥32.5b in cash and CN¥8.64b in receivables that were due within 12 months. So its liabilities total CN¥9.07b more than the combination of its cash and short-term receivables.

FAW Jiefang GroupLtd has a market capitalization of CN¥40.6b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, FAW Jiefang GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine FAW Jiefang GroupLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, FAW Jiefang GroupLtd reported revenue of CN¥56b, which is a gain of 38%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is FAW Jiefang GroupLtd?

While FAW Jiefang GroupLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥1.4b. 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 FAW Jiefang 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with FAW Jiefang GroupLtd , and understanding them should be part of your investment process.

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.