Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Qingdao Guolin Technology Group Co.,Ltd. (SZSE:300786) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Qingdao Guolin Technology GroupLtd's Debt?

The chart below, which you can click on for greater detail, shows that Qingdao Guolin Technology GroupLtd had CN¥106.0m in debt in September 2024; about the same as the year before. However, it does have CN¥174.5m in cash offsetting this, leading to net cash of CN¥68.5m.

How Strong Is Qingdao Guolin Technology GroupLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Qingdao Guolin Technology GroupLtd had liabilities of CN¥396.2m due within 12 months and liabilities of CN¥157.7m due beyond that. Offsetting this, it had CN¥174.5m in cash and CN¥251.1m in receivables that were due within 12 months. So its liabilities total CN¥128.3m more than the combination of its cash and short-term receivables.

Given Qingdao Guolin Technology GroupLtd has a market capitalization of CN¥3.71b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Qingdao Guolin Technology 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 Qingdao Guolin Technology 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.

In the last year Qingdao Guolin Technology GroupLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 35%, to CN¥482m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Qingdao Guolin Technology GroupLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Qingdao Guolin Technology GroupLtd had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥91m and booked a CN¥60m accounting loss. With only CN¥68.5m on the balance sheet, it would appear that its going to need to raise capital again soon. Qingdao Guolin Technology GroupLtd's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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 Qingdao Guolin Technology GroupLtd .

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.