Is Guangzhou Automobile Group (HKG:2238) Weighed On By Its Debt Load?

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. As with many other companies Guangzhou Automobile Group Co., Ltd. (HKG:2238) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Guangzhou Automobile Group

What Is Guangzhou Automobile Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Guangzhou Automobile Group had CN¥16.0b of debt, an increase on CN¥15.1b, over one year. However, its balance sheet shows it holds CN¥27.5b in cash, so it actually has CN¥11.5b net cash.

How Healthy Is Guangzhou Automobile Group's Balance Sheet?

The latest balance sheet data shows that Guangzhou Automobile Group had liabilities of CN¥48.8b due within a year, and liabilities of CN¥12.8b falling due after that. Offsetting this, it had CN¥27.5b in cash and CN¥23.5b in receivables that were due within 12 months. So it has liabilities totalling CN¥10.6b more than its cash and near-term receivables, combined.

Of course, Guangzhou Automobile Group has a titanic market capitalization of CN¥102.6b, 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. 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 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 21%, to CN¥83b. Shareholders probably have their fingers crossed that it can grow its way to profits.

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 taking that on face value, and considering the cash, we don't think its very risky in the near 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Guangzhou Automobile Group (of which 1 is concerning!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.