Does Guangzhou Automobile Group (HKG:2238) Have A Healthy Balance Sheet?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Guangzhou Automobile Group Co., Ltd. (HKG:2238) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Guangzhou Automobile Group

How Much Debt Does Guangzhou Automobile Group Carry?

As you can see below, at the end of December 2020, Guangzhou Automobile Group had CN¥14.9b of debt, up from CN¥13.9b a year ago. Click the image for more detail. However, it does have CN¥30.1b in cash offsetting this, leading to net cash of CN¥15.2b.

How Healthy Is Guangzhou Automobile Group's Balance Sheet?

The latest balance sheet data shows that Guangzhou Automobile Group had liabilities of CN¥42.4b due within a year, and liabilities of CN¥13.8b falling due after that. Offsetting these obligations, it had cash of CN¥30.1b as well as receivables valued at CN¥17.6b due within 12 months. So it has liabilities totalling CN¥8.45b more than its cash and near-term receivables, combined.

Of course, Guangzhou Automobile Group has a titanic market capitalization of CN¥92.5b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Guangzhou Automobile Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Guangzhou Automobile Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Guangzhou Automobile Group wasn't profitable at an EBIT level, but managed to grow its revenue by 5.9%, to CN¥63b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Guangzhou Automobile Group?

While Guangzhou Automobile Group lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥6.0b. 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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, we've discovered 3 warning signs for Guangzhou Automobile Group (1 is a bit unpleasant!) that you should be aware of before investing here.

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.

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