We Think Ganfeng Lithium Group (SZSE:002460) Has A Fair Chunk Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Ganfeng Lithium Group Co., Ltd. (SZSE:002460) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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, 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.

Check out our latest analysis for Ganfeng Lithium Group

How Much Debt Does Ganfeng Lithium Group Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Ganfeng Lithium Group had debt of CN¥26.7b, up from CN¥18.1b in one year. However, because it has a cash reserve of CN¥9.72b, its net debt is less, at about CN¥16.9b.

How Strong Is Ganfeng Lithium Group's Balance Sheet?

We can see from the most recent balance sheet that Ganfeng Lithium Group had liabilities of CN¥20.5b falling due within a year, and liabilities of CN¥20.8b due beyond that. Offsetting these obligations, it had cash of CN¥9.72b as well as receivables valued at CN¥6.53b due within 12 months. So it has liabilities totalling CN¥25.1b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Ganfeng Lithium Group has a market capitalization of CN¥48.5b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ganfeng Lithium Group can strengthen its balance sheet over time. 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¥29b, which is a fall of 38%. To be frank that doesn't bode well.

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¥2.8b 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. So we think its balance sheet is a little strained, though not beyond repair. 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 3 warning signs with Ganfeng Lithium Group , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.