Is Grand Baoxin Auto Group (HKG:1293) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Grand Baoxin Auto Group Limited (HKG:1293) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Grand Baoxin Auto Group

What Is Grand Baoxin Auto Group's Debt?

As you can see below, Grand Baoxin Auto Group had CN¥7.72b of debt at December 2022, down from CN¥9.02b a year prior. However, it does have CN¥596.4m in cash offsetting this, leading to net debt of about CN¥7.13b.

How Strong Is Grand Baoxin Auto Group's Balance Sheet?

According to the last reported balance sheet, Grand Baoxin Auto Group had liabilities of CN¥13.6b due within 12 months, and liabilities of CN¥3.90b due beyond 12 months. On the other hand, it had cash of CN¥596.4m and CN¥7.11b worth of receivables due within a year. So its liabilities total CN¥9.80b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥881.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Grand Baoxin Auto Group would likely require a major re-capitalisation if it had to pay its creditors today. 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 Grand Baoxin Auto 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.

In the last year Grand Baoxin Auto Group had a loss before interest and tax, and actually shrunk its revenue by 16%, to CN¥32b. We would much prefer see growth.

Caveat Emptor

While Grand Baoxin Auto Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CN¥503m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost CN¥698m in the last year. So we think buying this stock is 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. Case in point: We've spotted 1 warning sign for Grand Baoxin Auto Group you should be aware of.

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.