Is Guangzhou Automobile Group (HKG:2238) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Guangzhou Automobile Group Co., Ltd. (HKG:2238) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Guangzhou Automobile Group

What Is Guangzhou Automobile Group's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Guangzhou Automobile Group had debt of CN¥16.4b, up from CN¥12.5b in one year. But on the other hand it also has CN¥24.4b in cash, leading to a CN¥8.00b net cash position.

A Look At Guangzhou Automobile Group's Liabilities

According to the last reported balance sheet, Guangzhou Automobile Group had liabilities of CN¥38.3b due within 12 months, and liabilities of CN¥12.9b due beyond 12 months. Offsetting this, it had CN¥24.4b in cash and CN¥18.3b in receivables that were due within 12 months. So it has liabilities totalling CN¥8.53b more than its cash and near-term receivables, combined.

Since publicly traded Guangzhou Automobile Group shares are worth a very impressive total of CN¥150.8b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Guangzhou Automobile Group boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Guangzhou Automobile 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.

In the last year Guangzhou Automobile Group wasn't profitable at an EBIT level, but managed to grow its revenue by 26%, to CN¥72b. With any luck the company will be able to grow its way to profitability.

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¥8.0b. 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. One positive is that Guangzhou Automobile Group is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Guangzhou Automobile Group (1 shouldn't be ignored!) that you should be aware of before investing here.

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.

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.

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