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. As with many other companies Ganfeng Lithium Group Co., Ltd. (SZSE:002460) makes use of debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Ganfeng Lithium Group's Net Debt?

As you can see below, at the end of June 2024, Ganfeng Lithium Group had CN¥30.0b of debt, up from CN¥23.5b a year ago. Click the image for more detail. On the flip side, it has CN¥9.09b in cash leading to net debt of about CN¥20.9b.

A Look At Ganfeng Lithium Group's Liabilities

According to the last reported balance sheet, Ganfeng Lithium Group had liabilities of CN¥26.4b due within 12 months, and liabilities of CN¥19.0b due beyond 12 months. On the other hand, it had cash of CN¥9.09b and CN¥5.11b worth of receivables due within a year. So its liabilities total CN¥31.2b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥48.1b, so it does suggest shareholders should keep an eye on Ganfeng Lithium Group's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ganfeng Lithium 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.

In the last year Ganfeng Lithium Group had a loss before interest and tax, and actually shrunk its revenue by 46%, to CN¥24b. To be frank that doesn't bode well.

Caveat Emptor

While Ganfeng Lithium Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥2.5b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥1.1b in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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 - Ganfeng Lithium Group has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.