Warren Buffett famously said, '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. Importantly, Qingdao Haier Biomedical Co.,Ltd (SHSE:688139) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Qingdao Haier BiomedicalLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Qingdao Haier BiomedicalLtd had CN¥36.5m of debt, an increase on CN¥6.00m, over one year. But on the other hand it also has CN¥1.85b in cash, leading to a CN¥1.81b net cash position.

How Strong Is Qingdao Haier BiomedicalLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Qingdao Haier BiomedicalLtd had liabilities of CN¥948.8m due within 12 months and liabilities of CN¥151.4m due beyond that. On the other hand, it had cash of CN¥1.85b and CN¥461.2m worth of receivables due within a year. So it can boast CN¥1.21b more liquid assets than total liabilities.

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

In fact Qingdao Haier BiomedicalLtd's saving grace is its low debt levels, because its EBIT has tanked 33% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Qingdao Haier BiomedicalLtd'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Qingdao Haier BiomedicalLtd 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. Looking at the most recent three years, Qingdao Haier BiomedicalLtd recorded free cash flow of 40% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Qingdao Haier BiomedicalLtd has CN¥1.81b in net cash and a decent-looking balance sheet. So we don't have any problem with Qingdao Haier BiomedicalLtd's use of debt. 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. Case in point: We've spotted 2 warning signs for Qingdao Haier BiomedicalLtd you should be aware of.

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.