David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that China Grand Automotive Services Group Co.,Ltd (SHSE:600297) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for China Grand Automotive Services GroupLtd

What Is China Grand Automotive Services GroupLtd's Net Debt?

As you can see below, China Grand Automotive Services GroupLtd had CN¥52.0b of debt at September 2023, down from CN¥54.7b a year prior. However, it also had CN¥12.2b in cash, and so its net debt is CN¥39.8b.

A Look At China Grand Automotive Services GroupLtd's Liabilities

According to the last reported balance sheet, China Grand Automotive Services GroupLtd had liabilities of CN¥62.6b due within 12 months, and liabilities of CN¥13.1b due beyond 12 months. On the other hand, it had cash of CN¥12.2b and CN¥4.79b worth of receivables due within a year. So its liabilities total CN¥58.7b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥15.4b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, China Grand Automotive Services GroupLtd would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if China Grand Automotive Services GroupLtd 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.

Over 12 months, China Grand Automotive Services GroupLtd made a loss at the EBIT level, and saw its revenue drop to CN¥134b, which is a fall of 3.1%. That's not what we would hope to see.

Caveat Emptor

Importantly, China Grand Automotive Services GroupLtd had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥219m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost CN¥2.7b in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's 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. Be aware that China Grand Automotive Services GroupLtd is showing 1 warning sign in our investment analysis , 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.