China Grand Automotive Services GroupLtd (SHSE:600297) Has Debt But No Earnings; Should You Worry?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies China Grand Automotive Services Group Co.,Ltd (SHSE:600297) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for China Grand Automotive Services GroupLtd

How Much Debt Does China Grand Automotive Services GroupLtd Carry?

The image below, which you can click on for greater detail, shows that China Grand Automotive Services GroupLtd had debt of CN¥52.0b at the end of September 2023, a reduction from CN¥54.7b over a year. However, because it has a cash reserve of CN¥12.2b, its net debt is less, at about CN¥39.8b.

A Look At China Grand Automotive Services GroupLtd's Liabilities

According to the last reported balance sheet, China Grand Automotive Services GroupLtd had liabilities of CN¥62.6b due within 12 months, and liabilities of CN¥13.1b due beyond 12 months. On the other hand, it had cash of CN¥12.2b and CN¥4.79b worth of receivables due within a year. So its liabilities total CN¥58.7b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥12.4b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, China Grand Automotive Services GroupLtd would likely require a major re-capitalisation if it had to pay its creditors today. 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 China Grand Automotive Services GroupLtd 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, China Grand Automotive Services GroupLtd made a loss at the EBIT level, and saw its revenue drop to CN¥134b, which is a fall of 3.1%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months China Grand Automotive Services GroupLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥219m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost CN¥2.7b in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - China Grand Automotive Services GroupLtd has 1 warning sign we think you should be aware of.

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.

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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.