Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Grinm Advanced Materials Co., Ltd. (SHSE:600206) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Grinm Advanced Materials Carry?

As you can see below, at the end of June 2024, Grinm Advanced Materials had CN¥1.43b of debt, up from CN¥1.04b a year ago. Click the image for more detail. However, it does have CN¥1.67b in cash offsetting this, leading to net cash of CN¥238.6m.

How Strong Is Grinm Advanced Materials' Balance Sheet?

According to the last reported balance sheet, Grinm Advanced Materials had liabilities of CN¥2.23b due within 12 months, and liabilities of CN¥402.6m due beyond 12 months. Offsetting this, it had CN¥1.67b in cash and CN¥1.46b in receivables that were due within 12 months. So it actually has CN¥497.5m more liquid assets than total liabilities.

This surplus suggests that Grinm Advanced Materials has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Grinm Advanced Materials boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Grinm Advanced Materials has boosted its EBIT by 90%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Grinm Advanced Materials can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Grinm Advanced Materials has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Grinm Advanced Materials saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Grinm Advanced Materials has CN¥238.6m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 90% over the last year. So we are not troubled with Grinm Advanced Materials's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Grinm Advanced Materials you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, 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 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.