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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Guangzhou Automobile Group Co., Ltd. (HKG:2238) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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

What Is Guangzhou Automobile Group's Net Debt?

As you can see below, at the end of September 2024, Guangzhou Automobile Group had CN¥36.0b of debt, up from CN¥25.3b a year ago. Click the image for more detail. But on the other hand it also has CN¥45.7b in cash, leading to a CN¥9.70b net cash position.

How Healthy Is Guangzhou Automobile Group's Balance Sheet?

According to the last reported balance sheet, Guangzhou Automobile Group had liabilities of CN¥82.4b due within 12 months, and liabilities of CN¥18.6b due beyond 12 months. Offsetting this, it had CN¥45.7b in cash and CN¥11.4b in receivables that were due within 12 months. So its liabilities total CN¥43.9b more than the combination of its cash and short-term receivables.

Guangzhou Automobile Group has a very large market capitalization of CN¥74.2b, so it could very likely raise cash to ameliorate 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, Guangzhou Automobile Group also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Guangzhou Automobile Group's ability to maintain a healthy balance sheet going forward. 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, Guangzhou Automobile Group made a loss at the EBIT level, and saw its revenue drop to CN¥106b, which is a fall of 17%. We would much prefer see growth.

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¥38m. So taking that on face value, and considering the cash, we don't think its very 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 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. For example Guangzhou Automobile Group has 2 warning signs (and 1 which is significant) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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