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.' 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. We note that Guangzhou Automobile Group Co., Ltd. (HKG:2238) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See 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 June 2023 Guangzhou Automobile Group had CN¥25.0b of debt, an increase on CN¥14.6b, over one year. But on the other hand it also has CN¥54.6b in cash, leading to a CN¥29.6b net cash position.
How Strong Is Guangzhou Automobile Group's Balance Sheet?
According to the last reported balance sheet, Guangzhou Automobile Group had liabilities of CN¥63.7b due within 12 months, and liabilities of CN¥15.2b due beyond 12 months. Offsetting this, it had CN¥54.6b in cash and CN¥31.6b in receivables that were due within 12 months. So it actually has CN¥7.33b more liquid assets than total liabilities.
This short term liquidity is a sign that Guangzhou Automobile Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Guangzhou Automobile Group has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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.
Over 12 months, Guangzhou Automobile Group reported revenue of CN¥123b, which is a gain of 37%, although it did not report any earnings before interest and tax. 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¥5.3b. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Keeping in mind its 37% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with Guangzhou Automobile Group .
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.