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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Grand Baoxin Auto Group Limited (HKG:1293) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Grand Baoxin Auto Group
What Is Grand Baoxin Auto Group's Debt?
As you can see below, at the end of December 2018, Grand Baoxin Auto Group had CN¥9.91b of debt, up from CN¥8.97b a year ago. Click the image for more detail. On the flip side, it has CN¥2.61b in cash leading to net debt of about CN¥7.30b.
How Strong Is Grand Baoxin Auto Group's Balance Sheet?
We can see from the most recent balance sheet that Grand Baoxin Auto Group had liabilities of CN¥14.2b falling due within a year, and liabilities of CN¥6.88b due beyond that. Offsetting this, it had CN¥2.61b in cash and CN¥7.65b in receivables that were due within 12 months. So it has liabilities totalling CN¥10.8b more than its cash and near-term receivables, combined.
This deficit casts a shadow over the CN¥4.10b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt After all, Grand Baoxin Auto Group would likely require a major re-capitalisation if it had to pay its creditors today.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.