Howard Marks says that instead of worrying about stock price fluctuations, “the possibility of permanent loss is the risk I worry about…and every practicing investor I know worries about that.” You expressed it well. When we think about a company’s risk, we always look at its use of debt. Because too much debt can lead to ruin. the important thing is, Guangzhou Automobile Group Co., Ltd. (HKG:2238) has debt. But the more important question is how much risk that debt creates.
What risks does debt pose?
Generally, debt only becomes a real problem if a company cannot easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company may go bankrupt if it is unable to pay its creditors. But a more common (but still expensive) situation is when a company needs to dilute shareholders at a cheap share price just to manage its debt. Of course, many companies use debt to fund growth, and there are no negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Guangzhou Automobile Group.
What is Guangzhou Automobile Group’s debt?
You can click on the graphic below for the historical numbers, but as of September 2023 Guangzhou Automobile Group had debt of CA$25.3b, up from CA$21.3b over one year. However, it also has CA$50.5b in cash offsetting this, meaning it has CA$25.2b in net cash.
How healthy is Guangzhou Automobile Group’s balance sheet?
According to the last reported balance sheet, Guangzhou Automobile Group had liabilities of RMB68.8b due within 12 months, and liabilities of RMB17.0b due beyond 12 months. Offsetting this, it had cash of CA$50.5b and his receivables of CA$10.0b due within 12 months. So its liabilities outweigh the sum of its cash and (short-term) receivables by CA$25.2b.
This may seem like a lot, but Guangzhou Automobile Group’s market capitalization is a whopping CAD 88.1 billion, and it could potentially strengthen its balance sheet by raising capital if needed, so it’s not that big of a deal. It’s not a bad thing. However, it is clear that we need to take a close look at whether debt can be managed without dilution. Despite its notable debt, Guangzhou Automobile Group boasts net cash, so it’s safe to say it doesn’t have a lot of debt. When analyzing debt levels, the balance sheet is the obvious place to start. However, what will determine whether Guangzhou Automobile Group can maintain a healthy balance sheet in the future will be its future earnings above all else.If you’re focused on the future, check this out free A report showing analyst profit forecasts.
Last year, Guangzhou Automobile Group was not profitable at the EBIT level, but was able to grow its revenue by 27% to C$128 billion. With any luck, the company will be able to grow to profitability.
So how dangerous is Guangzhou Automobile Group?
Guangzhou Automobile Group made an earnings before interest, tax and tax (EBIT) loss in the last 12 months, but its statutory profit was CA$4.5 billion. So given the net cash on top of its statutory profit, this stock is probably less risky than you think, at least in the short term. The good news for Guangzhou Automobile Group shareholders is that the company’s earnings growth is strong, making it easier to raise capital if needed. However, we still consider it somewhat dangerous. When analyzing debt levels, the balance sheet is the obvious place to start. Ultimately, however, any company can contain risks that exist outside the balance sheet. We’ve identified 3 warning signs for you We have partnerships with Guangzhou Automobile Group, and understanding them should be part of the investment process.
If you’re more interested in fast-growing companies with rock-solid balance sheets, then check out our list of net cash growth stocks without delay.
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.