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 Anhui Jianghuai Automobile Group Corp.,Ltd. (SHSE:600418) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

What Is Anhui Jianghuai Automobile GroupLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Anhui Jianghuai Automobile GroupLtd had debt of CN¥8.32b at the end of September 2023, a reduction from CN¥11.6b over a year. However, it does have CN¥14.3b in cash offsetting this, leading to net cash of CN¥5.97b.

A Look At Anhui Jianghuai Automobile GroupLtd's Liabilities

We can see from the most recent balance sheet that Anhui Jianghuai Automobile GroupLtd had liabilities of CN¥31.2b falling due within a year, and liabilities of CN¥5.35b due beyond that. Offsetting this, it had CN¥14.3b in cash and CN¥8.50b in receivables that were due within 12 months. So its liabilities total CN¥13.8b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Anhui Jianghuai Automobile GroupLtd has a market capitalization of CN¥38.2b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Anhui Jianghuai Automobile GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Anhui Jianghuai Automobile GroupLtd'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 Anhui Jianghuai Automobile GroupLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to CN¥43b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Anhui Jianghuai Automobile GroupLtd?

Although Anhui Jianghuai Automobile GroupLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥2.8b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Anhui Jianghuai Automobile GroupLtd's profit, revenue, and operating cashflow have changed over the last few years.

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.

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.