The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies COL Group Co.,Ltd. (SZSE:300364) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is COL GroupLtd's Net Debt?

The chart below, which you can click on for greater detail, shows that COL GroupLtd had CN¥225.0m in debt in March 2024; about the same as the year before. But it also has CN¥266.1m in cash to offset that, meaning it has CN¥41.1m net cash.

How Strong Is COL GroupLtd's Balance Sheet?

We can see from the most recent balance sheet that COL GroupLtd had liabilities of CN¥541.9m falling due within a year, and liabilities of CN¥35.8m due beyond that. Offsetting these obligations, it had cash of CN¥266.1m as well as receivables valued at CN¥180.5m due within 12 months. So its liabilities total CN¥131.1m more than the combination of its cash and short-term receivables.

This state of affairs indicates that COL GroupLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥14.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, COL GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if COL GroupLtd can strengthen its balance sheet over time. 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, COL GroupLtd reported revenue of CN¥1.3b, which is a gain of 8.6%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is COL GroupLtd?

While COL GroupLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥58m. 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. 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. For instance, we've identified 2 warning signs for COL GroupLtd that 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.

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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.