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 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 note that FAW Jiefang Group Co.,Ltd (SZSE:000800) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
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. 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is FAW Jiefang GroupLtd's Debt?
As you can see below, at the end of September 2023, FAW Jiefang GroupLtd had CN¥31.6m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥32.5b in cash to offset that, meaning it has CN¥32.5b net cash.
A Look At FAW Jiefang GroupLtd's Liabilities
According to the last reported balance sheet, FAW Jiefang GroupLtd had liabilities of CN¥45.1b due within 12 months, and liabilities of CN¥5.12b due beyond 12 months. Offsetting these obligations, it had cash of CN¥32.5b as well as receivables valued at CN¥8.64b due within 12 months. So its liabilities total CN¥9.07b more than the combination of its cash and short-term receivables.
This deficit isn't so bad because FAW Jiefang GroupLtd is worth CN¥38.9b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, FAW Jiefang GroupLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 FAW Jiefang 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, FAW Jiefang GroupLtd reported revenue of CN¥56b, which is a gain of 38%, 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 FAW Jiefang GroupLtd?
While FAW Jiefang GroupLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥1.4b. So taking that on face value, and considering the cash, we don't think its very risky in the near term. One positive is that FAW Jiefang GroupLtd is growing revenue apace, which makes it easier to sell a growth story and 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for FAW Jiefang GroupLtd 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.
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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.