Is Guangzhou Automobile Group (HKG:2238) Using Too Much Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Guangzhou Automobile Group Co., Ltd. (HKG:2238) does carry debt. But should shareholders be worried about its use of debt?

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Guangzhou Automobile Group Carry?

The image below, which you can click on for greater detail, shows that Guangzhou Automobile Group had debt of CN¥27.1b at the end of June 2025, a reduction from CN¥35.3b over a year. But on the other hand it also has CN¥59.3b in cash, leading to a CN¥32.2b net cash position.

How Strong Is Guangzhou Automobile Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Guangzhou Automobile Group had liabilities of CN¥79.1b due within 12 months and liabilities of CN¥15.9b due beyond that. Offsetting these obligations, it had cash of CN¥59.3b as well as receivables valued at CN¥15.8b due within 12 months. So it has liabilities totalling CN¥19.9b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Guangzhou Automobile Group has a market capitalization of CN¥65.8b, 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. While it does have liabilities worth noting, Guangzhou Automobile Group also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Guangzhou Automobile 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.

See our latest analysis for Guangzhou Automobile Group

Over 12 months, Guangzhou Automobile Group made a loss at the EBIT level, and saw its revenue drop to CN¥104b, which is a fall of 8.7%. We would much prefer see growth.

So How Risky Is Guangzhou Automobile Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Guangzhou Automobile Group had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥13b and booked a CN¥3.2b accounting loss. With only CN¥32.2b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. For riskier companies like Guangzhou Automobile Group I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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.

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.