Is FAW Jiefang GroupLtd (SZSE:000800) Using Debt In A Risky Way?

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. As with many other companies FAW Jiefang Group Co.,Ltd (SZSE:000800) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is FAW Jiefang GroupLtd's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 FAW Jiefang GroupLtd had debt of CN¥29.9m, up from none in one year. But on the other hand it also has CN¥19.9b in cash, leading to a CN¥19.8b net cash position.

How Healthy Is FAW Jiefang GroupLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that FAW Jiefang GroupLtd had liabilities of CN¥41.1b due within 12 months and liabilities of CN¥5.07b due beyond that. Offsetting these obligations, it had cash of CN¥19.9b as well as receivables valued at CN¥18.4b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥7.86b.

Since publicly traded FAW Jiefang GroupLtd shares are worth a total of CN¥40.2b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, FAW Jiefang GroupLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. 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.

See our latest analysis for FAW Jiefang GroupLtd

In the last year FAW Jiefang GroupLtd had a loss before interest and tax, and actually shrunk its revenue by 8.3%, to CN¥59b. That's not what we would hope to see.

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¥622m. So taking that on face value, and considering the cash, we don't think its very 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for FAW Jiefang GroupLtd that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.