Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Anhui Jianghuai Automobile Group Corp.,Ltd. (SHSE:600418) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

How Much Debt Does Anhui Jianghuai Automobile GroupLtd Carry?

The image below, which you can click on for greater detail, shows that Anhui Jianghuai Automobile GroupLtd had debt of CN¥6.99b at the end of September 2024, a reduction from CN¥8.32b over a year. But it also has CN¥17.1b in cash to offset that, meaning it has CN¥10.1b net cash.

A Look At Anhui Jianghuai Automobile GroupLtd's Liabilities

We can see from the most recent balance sheet that Anhui Jianghuai Automobile GroupLtd had liabilities of CN¥28.5b falling due within a year, and liabilities of CN¥6.92b due beyond that. On the other hand, it had cash of CN¥17.1b and CN¥5.71b worth of receivables due within a year. So its liabilities total CN¥12.6b more than the combination of its cash and short-term receivables.

Given Anhui Jianghuai Automobile GroupLtd has a humongous market capitalization of CN¥86.2b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Anhui Jianghuai Automobile GroupLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Anhui Jianghuai Automobile GroupLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Anhui Jianghuai Automobile GroupLtd's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is Anhui Jianghuai Automobile GroupLtd?

Although Anhui Jianghuai Automobile GroupLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥593m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. Be aware that Anhui Jianghuai Automobile GroupLtd is showing 1 warning sign in our investment analysis , you should know about...

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.

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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.