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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Visual China Group Co.,Ltd. (SZSE:000681) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Visual China GroupLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Visual China GroupLtd had debt of CN¥100.4m, up from CN¥88.9m in one year. However, its balance sheet shows it holds CN¥398.5m in cash, so it actually has CN¥298.0m net cash.

How Strong Is Visual China GroupLtd's Balance Sheet?

The latest balance sheet data shows that Visual China GroupLtd had liabilities of CN¥471.6m due within a year, and liabilities of CN¥211.1m falling due after that. On the other hand, it had cash of CN¥398.5m and CN¥260.3m worth of receivables due within a year. So it has liabilities totalling CN¥24.0m more than its cash and near-term receivables, combined.

This state of affairs indicates that Visual China 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¥9.62b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Visual China GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Visual China GroupLtd grew its EBIT at 17% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Visual China GroupLtd'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Visual China GroupLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Visual China GroupLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Visual China GroupLtd has CN¥298.0m in net cash. And it impressed us with free cash flow of CN¥107m, being 140% of its EBIT. So we don't think Visual China GroupLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Visual China GroupLtd .

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.