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.' 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. We can see that Guangzhou Automobile Group Co., Ltd. (HKG:2238) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Guangzhou Automobile Group

How Much Debt Does Guangzhou Automobile Group Carry?

As you can see below, Guangzhou Automobile Group had CN¥12.8b of debt at March 2022, down from CN¥15.1b a year prior. However, its balance sheet shows it holds CN¥23.6b in cash, so it actually has CN¥10.8b net cash.

A Look At Guangzhou Automobile Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Guangzhou Automobile Group had liabilities of CN¥46.2b due within 12 months and liabilities of CN¥9.30b due beyond that. On the other hand, it had cash of CN¥23.6b and CN¥14.1b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥17.8b.

Since publicly traded Guangzhou Automobile Group shares are worth a very impressive total of CN¥138.9b, it seems unlikely that this level of liabilities would be a major threat. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Guangzhou Automobile Group can strengthen its balance sheet over time. 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 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. 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 instance, we've identified 2 warning signs for Guangzhou Automobile Group (1 is concerning) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.