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

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.' 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. Importantly, Guangzhou Automobile Group Co., Ltd. (HKG:2238) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Guangzhou Automobile Group

What Is Guangzhou Automobile Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Guangzhou Automobile Group had CN¥25.3b of debt, an increase on CN¥21.3b, over one year. But it also has CN¥50.5b in cash to offset that, meaning it has CN¥25.2b net cash.

How Healthy Is Guangzhou Automobile Group's Balance Sheet?

According to the last reported balance sheet, Guangzhou Automobile Group had liabilities of CN¥68.8b due within 12 months, and liabilities of CN¥17.0b due beyond 12 months. Offsetting this, it had CN¥50.5b in cash and CN¥10.0b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥25.2b.

While this might seem like a lot, it is not so bad since Guangzhou Automobile Group has a huge market capitalization of CN¥88.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 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'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 27%, to CN¥128b. With any luck the company will be able to grow its way to profitability.

So How Risky Is Guangzhou Automobile Group?

Although Guangzhou Automobile Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥4.5b. 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. The good news for Guangzhou Automobile Group shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Guangzhou Automobile 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.