Ganfeng Lithium Group (SZSE:002460) Is Carrying A Fair Bit Of 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.' 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 note that Ganfeng Lithium Group Co., Ltd. (SZSE:002460) 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. 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 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 Ganfeng Lithium Group

How Much Debt Does Ganfeng Lithium Group Carry?

As you can see below, at the end of September 2024, Ganfeng Lithium Group had CN¥32.6b of debt, up from CN¥27.3b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥7.06b, its net debt is less, at about CN¥25.5b.

A Look At Ganfeng Lithium Group's Liabilities

The latest balance sheet data shows that Ganfeng Lithium Group had liabilities of CN¥26.7b due within a year, and liabilities of CN¥19.8b falling due after that. Offsetting these obligations, it had cash of CN¥7.06b as well as receivables valued at CN¥4.73b due within 12 months. So its liabilities total CN¥34.8b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Ganfeng Lithium Group is worth CN¥63.2b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Ganfeng Lithium Group'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, Ganfeng Lithium Group made a loss at the EBIT level, and saw its revenue drop to CN¥21b, which is a fall of 47%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Ganfeng Lithium Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥3.6b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥4.4b of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Ganfeng Lithium Group , 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.