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 can see that Guangzhou Pearl River Piano Group Co.,Ltd (SZSE:002678) does use debt in its business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Guangzhou Pearl River Piano GroupLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Guangzhou Pearl River Piano GroupLtd had CN¥131.3m of debt in September 2024, down from CN¥418.5m, one year before. But on the other hand it also has CN¥906.3m in cash, leading to a CN¥775.0m net cash position.

A Look At Guangzhou Pearl River Piano GroupLtd's Liabilities

According to the last reported balance sheet, Guangzhou Pearl River Piano GroupLtd had liabilities of CN¥380.9m due within 12 months, and liabilities of CN¥147.9m due beyond 12 months. Offsetting this, it had CN¥906.3m in cash and CN¥206.3m in receivables that were due within 12 months. So it can boast CN¥583.8m more liquid assets than total liabilities.

This surplus suggests that Guangzhou Pearl River Piano GroupLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Guangzhou Pearl River Piano GroupLtd has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Guangzhou Pearl River Piano GroupLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Guangzhou Pearl River Piano GroupLtd had a loss before interest and tax, and actually shrunk its revenue by 40%, to CN¥753m. To be frank that doesn't bode well.

So How Risky Is Guangzhou Pearl River Piano GroupLtd?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Guangzhou Pearl River Piano GroupLtd had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥411m of cash and made a loss of CN¥139m. With only CN¥775.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 1 warning sign for Guangzhou Pearl River Piano GroupLtd you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.